| UNITED STATES |
| SECURITIES AND EXCHANGE COMMISSION |
| WASHINGTON, D.C. 20549 |
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| FORM 10-K |
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| [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the fiscal year ended December 31, 2013 |
| OR |
| [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from _____ to _______ |
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| Commission File Number: 001-09014 |
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| CHYRONHEGO CORPORATION |
| (Exact name of registrant as specified in its charter) |
| | | |
| New York | | 11-2117385 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
| 5 Hub Drive, Melville, New York | | 11747 |
| (Address of principal executive offices) | | (Zip Code) |
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| Registrant's telephone number, including area code: (631) 845-2000 |
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| Securities registered pursuant to Section 12(b) of the Act: |
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| Common Stock, par value $0.01 per share | | The NASDAQ Global Market |
| (Title of Class) | | (Name of exchange on which registered) |
| | | |
| Securities registered pursuant to Section 12(g) of the Act: None |
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| Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes[ ] No[x] |
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| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes[ ] No[x] |
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| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[x] No[ ] |
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| Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes[ x ] No[ ] |
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| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] |
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| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): |
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| Large accelerated filer [ ] | Accelerated filer[ ] | Non-accelerated filer [ ] | Smaller reporting company [x] |
| | | (do not check if a smaller reporting company) | |
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x] |
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The aggregate market value of the Company's voting and non-voting common equity held by non-affiliates of the Company (without admitting that any person whose shares are not included in such calculations is an affiliate) on June 30, 2013 was $20,347,482. The number of shares outstanding of the issuer's common stock, par value $.01 per share, on March 7, 2014 was 31,216,353. |
DOCUMENTS INCORPORATED BY REFERENCE |
| Portions of the proxy statement for the 2014 Annual Meeting of Shareholders are incorporated by reference into Part III. |
ITEM 1. BUSINESS
The following Business Section contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors (see Part I, Item 1A: Risk Factors). Unless the context otherwise requires, references to "ChyronHego," "the Company," "we," "our," and "us," in this Annual Report on Form 10-K refer to ChyronHego Corporation and our subsidiaries.
Overview
In May 2013, Chyron Corporation acquired the outstanding stock of Hego Aktiebolag, and the combined company changed its name to ChyronHego Corporation. ChyronHego is a global leader in broadcast graphics creation, playout, and real-time data visualization offering a wide variety of products and services for live television, news, and sports production. ChyronHego's end-to-end graphics offerings include hosted services for graphics creation and order management, on-air graphics systems, clip servers, social media and second screen applications, channel branding, graphics asset management, touch graphics, telestration, virtual placement and player tracking.
From the newsroom to the control room to the mobile unit on-the-go, ChyronHego continues to develop innovative technology for the unique and shifting demands of live production. With industry-winning solutions such as the Axis World Graphics online content creation and order management system, the TRACAB image tracking system, and Paint, our popular sports production telestrator and analysis tool, ChyronHego's fully integrated product line offers custom-tailored, cost-effective graphics solutions and services to the community of professionals who create, manage and distribute media content worldwide.
ChyronHego's graphics products and services are used by thousands of broadcasters from around the world including ABC, FOX, NBC, CBS, ESPN, Turner Entertainment Networks, The Golf Channel, Home Shopping Network, ITVNews, the BBC, NRK, SVT, TV4, SkySports, Korean Broadcasting, Germany's BR and NDR networks, English Premier League, German Bundesliga, Spanish LaLiga plus local stations in most major television markets.
Headquartered in New York, the Company also has offices in Sweden, Finland, Norway, Denmark, Czech Republic, Germany, Slovak Republic, the United Kingdom, Mexico, and Singapore.
Our Markets
We provide products and services for the creation and enhancement of live television, news and sports production. Our customers include foremost broadcast, cable, satellite and post-production facilities in most major television markets worldwide. Our end-to-end offerings include graphics workflow, on-air graphics systems, channel branding, graphics asset
management, touch graphics, telestration, virtual placement and player tracking that are used in the following environments:
| | · | Sports - Eye catching graphics with complex and detailed analysis on the field of play; |
| | · | News - Solutions designed to enhance creativity and accelerate news workflow; |
| | · | Entertainment - Advanced live broadcast solutions enabling producers to deal with the complexities of participant interaction, timing and results, video-wall graphics and commentator support systems; |
| | · | Channel Branding - Solutions that capture and keep the viewer's attention by delivering up-to-the-minute headlines, sports scores, financial data, weather reports and social media interaction; |
| | · | Elections - Gathering, managing and presenting real-time information is one of our core strengths. Our election solutions span the entire chain from multi-touch wall presentations to virtual graphics; |
| | · | Stadiums and Venues - Creating graphics that engage fans, strengthen franchise brand and generate sponsor revenues; |
| | · | Trucks & Remotes - Innovative, flexible and reliable solutions that are used by leading mobile teleproduction providers to enhance their storytelling of major news, sports and entertainment event programming. |
Our Products and Services
We offer a broad range of powerful software and hardware products and solutions and services that are designed to provide broadcast-quality, real-time, graphics creation, enhancement and playout for television stations, networks, video production and post-production markets.
We are dedicated to providing the highest quality and most comprehensive array of advanced solutions, ranging from low-cost character generators to fully-integrated workflows that provide precision creation, playout and management of text, stills, clips, effects, audio, graphics storage, newsroom integration, and multi-format distribution and to web-hosted graphics creation accessible from anywhere. Our main strategic objective is to be at the forefront of technology development in our industry and to ensure that our product and services portfolio and product roadmap are world leading.
Our products
Broadcast graphics
| | · | Lyric® PRO - our graphics creation software. We understand that our customers place a premium on graphics workflow and having the shortest cycle time to air. Lyric PRO 8.7 adds many new features and reaffirms our commitment to a "scriptless" creative environment. Lyric PRO is engineered with high-performance features that provide ease of use under all conditions and by everyone on the production staff, including artists, operators, producers, directors and engineering. Among the new features in Lyric PRO are Advanced Data Object and Auto Formatting Tools, which combine to |
make it easy to create data bound, multi-use templates without the need to write complex scripts or macros.
| | · | MosaicTM - is a tightly integrated turnkey platform that scales to fit our customer's graphics production, technical requirements and budget, and an ideal solution for today's most demanding traditional or automated production workflows. Mosaic operates in combination with our iSQ multi-playlist controller or a third-party automation playout interface. When combined with Lyric, Mosaic forms the cornerstone of BlueNetTM, our streamlined, end-to-end graphics creation and playout workflow solution. |
| | · | Graffiti - a new family of professional character generators. From the control room to the mobile unit on-the-go, Graffiti offers producers state-of-the-art graphics creation and playout at an entirely new price point. Graffiti integrates seamlessly into existing workflows and serves as a key component in our end-to-end BlueNet solution, which combines advanced graphics creation, collaboration, management, and playout systems to ensure the shortest cycle time to air and the highest production value. |
| | · | GS2 Graphics Engine - is a state-of-the-art real-time 3D graphics platform designed for use in multiple applications, such as fully automated channel branding, live 3D ticker solutions, or streamlined news workflows. The GS2 engine and its suite of adjoining tools offers one of the most powerful and adaptable live graphics systems on the market. It is widely deployed on many diverse live graphics production applications from small OB productions to major 24x7 news channels and channel branding installations. The GS2 engine is also one of the few true 64-bit engines on the market, giving it a huge performance advantage when working with large graphics assets such as uncompressed HD video clips and multiple video textures. |
Workflows
| | · | BlueNetTM - our end-to-end graphics workflow for news, sports and entertainment. The lessons learned from over 40 years of experience, working side-by-side with broadcasters in the production and playout of live graphics, has guided our engineering, design and workflow specialists to create solutions that are as intuitive and connected to our customer's business as they are to each other. BlueNet's comprehensive broadcast graphics workflow tightly integrates one of the world's most advanced graphics creation, collaboration, management, and playout systems available. Broadcasters of all types and sizes depend on BlueNet every day to minimize the cycle time from creation to air, ensuring the highest production value in the shortest time - every time. |
| | · | Axis World Graphics - is a leader in secure, hosted, on-demand graphics production. At its core, Axis World Graphics is all about ease of use. Customers from reporters to editors to news producers are able to quickly use templates to create graphics for broadcast, websites, and second screen displays, such as mobile phones and tablet PCs. Graphics creation that once took hours can now take minutes, allowing graphic |
artists to concentrate on more complex graphic design. The result is a fast return on investment, and a faster graphics cycle time to air. Axis World Graphics is designed to be intuitive and form the foundation of an array of web-based services customized to
a customer's unique brand - a technology that is generally unavailable anywhere else in the world. These services include high-resolution maps, 3D charts, financial quotes and a virtually unlimited set of tools to create topical news graphics.
| | · | CAMIO - our graphics asset management server, redefines the news production workflow by seamlessly integrating a MOS gateway, asset management, distribution, and playout control. CAMIO's graphic asset management workflow is simple by design. Graphic artists create and upload templates and graphics assets. Producers and journalists remotely browse the templates, edit text and select their OTS images or other graphics using LUCI, our Newsroom ActiveX® client. When the templates are fulfilled and added to a story, CAMIO automatically ensures all content is distributed to the playout devices. The net effect is a smooth running graphics workflow that greatly increases the speed of getting important graphics to air while reducing the possibility of mistakes. |
| | · | ENGAGE - connects our CAMIO and Lyric playout systems to a variety of social media services, making it easy to include social media content in programming, without big changes to the workflow. Rich call-to-action graphics, info-graphics, and tickers are automatically integrated using social and poll data. |
Channel Branding
| | · | Channel Box 2 - built on an entirely redesigned architecture and a host of new features, Version 5.0 offers a faster and easier way to deliver bold branding elements such as up-to-the-minute headlines; sports scores; financial data, weather reports; snipes; social media commentary; and automated promotional materials. With power and interoperability, and providing a return on investment, Channel Box captures and keeps viewers by delivering up-to-the-minute headlines, sports scores, financial data, and weather reports. Live to air credit squeezes, "L" frame tickers, snips, automated promos and much more are available when and where customers want them. Workflow tools like Content Distribution and Desktop Multi-Viewer with Remote Asset Viewing create a complete, holistic branding workflow environment. Channel Box supports ODBC data sources, text files, XML and a full C# and VB Scripting engine. Control over the system is just as extensive with support for our industry-standard Intelligent Interface protocol, VDCP, GPI, COM API, or manual control via the custom control panel. |
Production Tools
| | · | Paint - a powerful sports production analysis tool, designed specifically for the needs of sports broadcasters. Its power lies behind its feature-rich set of tools and its simplicity of use. The result is a highly productive tool that can be used by anybody within a sports production team, whether they are behind the camera or in front of it. |
Paint is used to visually analyze game-play within a sport by graphically enhancing and highlighting video using a variety of telestration tools. Within a typical hour of a game, dozens of telestrated clips can be created either live, or stored ready for near-live replays
or post match analysis.
| | · | GS2 Multi-Touch - is the platform that we use to build some of our most compelling broadcast touchscreens. GS2 Multi-Touch has been deployed on many hundreds of high profile live studio productions by some of the largest broadcasters and used to enhance their coverage of sports events, elections and on other live show material. This has enabled GS2 Multi-Touch to become a trusted medium that helps broadcasters to tell the story in a more natural and intuitive manner, while enabling them to interact with the content directly and confidently. |
| | · | SHOUTTM - make viewers a part of the conversation with SHOUT, ChyronHego's easy-to-use social media editor. Ideal for news, sports, and entertainment, SHOUT is a software solution that lets broadcasters quickly air social media conversations, including those from Twitter®, Facebook®, Instagram®, YouTube™ and RSS feeds, using any of our Lyric-based graphics system - including Channel Box. In addition, Mass Relevance® subscribers can now insert data streams directly into SHOUT. Enhance viewer engagement through a more interactive entertainment and information experience, and instantly create an online community and buzz around the broadcast - with SHOUT. |
| | · | MediaMakerTM - access to graphics has never been more critical, particularly in today's multi-platform newsroom production and editing environments. Part of the CAMIO newsroom workflow product line, MediaMaker seamlessly integrates our graphics creation tools with file-based workflows, including LUCI template fulfillment, Axis World Graphics and OMS content creation. MediaMaker extends our BlueNet graphics creation capabilities into a wide range of editing and third-party applications, including Apple® Final Cut Pro®, Adobe® Premiere® PRO, Grass ValleyTM EDIUS, and Dalet. |
Virtual graphics
| | · | Virtual Placement - a powerful tool that turns the complex art of placing virtual graphics within live video into a quick and simple process. With no need to add any specialist camera encoders or lengthy calibration processes, virtual graphics can be placed into a scene within minutes of setup, ready for use in a multitude of applications. The system can be used in virtually any live broadcast scenario, from augmenting physical studio-sets with virtual objects or live broadcast graphics and video feeds, to much larger scenes such as sports arenas, race-tracks or landscapes. The aim throughout is simple: to place virtual elements into a live scene to make them look physically real and in harmony with the environment they are projected into. |
Sports Data
| | · | TRACAB - this system represents a high level of tracking technology. It uses advanced patented image processing technology to identify the position and speed of all moving objects within arena-based sports, and does this uniquely in true real-time. The resultant live data of highly accurate X, Y and Z coordinates is supplied 25 times every second for each and every viewable object, whether they are players, referees or even the ball. Spanning almost a decade of continued development and deployed across the most demanding live sports environments and many thousands of sports events, the TRACAB player tracking system has matured to become the defining standard in live sports tracking and a world leading system in this field. |
Our Services
| | · | Production Services - we are always ready to take on almost any broadcast graphics assignment on a service basis. We have complete solutions for broadcast graphics both for studio production and all major sports events. We are one of a few companies in the world that has the comprehensive knowledge and experience in offering turn-key solutions including complete timing and results services, information management and TV graphics services for sports events. We have delivered critical services for major broadcasters and numerous high profile sporting events such as the Olympic Games, Formula 1, as well as World and European Championships in almost every major sport. We support thousands of live events each year and this gives us the extensive knowledge, experience and confidence in our staff and solutions to deliver what the next production requires. |
| | · | Custom Development - our strength in this area is derived from the unique combination of curiosity, innovative technology and a pragmatic yet passionate approach to solution design. We are recognized as leading innovators in the technological development of graphics creation, workflow, and data visualization solutions for news, sports, and live entertainment production. Working with and listening to our customers, we build solutions from a select blend of best-of-breed technology components and standards-based commodity infrastructure. This ensures that we will deliver a high performance solution, customized to the customer's requirements, in a cost-effective manner. Our custom solutions are designed for a purpose. Our focus is on productive use and flexibility. Whether the production calls for virtual graphics, advanced image data analysis or advanced graphic design, we deliver. |
| | · | Timing and Data Services - in today's high-action, stats-driven broadcast sports environment, every detail needs to be captured and delivered live, and we have been at the forefront of this area for over 40 years. We have devoted ourselves to the creation of reliable and scalable solutions for the management and visualization of live sports information. From statistics gathering to timing and data services, we are one of the few companies in the world that has the know-how to deliver turnkey solutions in this specialized domain. We offer statistics systems designed for the live |
gathering of data from all major sports such as football, hockey, basketball, baseball, soccer and many more. Our systems can be implemented on a match-by-match basis or in league-wide deployment. We have
delivered these types of critical services for major broadcasters and numerous high profile sporting events. We support thousands of live events each year and this gives us the extensive knowledge, experience and confidence to deliver what the next production
requires.
ChyronHego Development Strategy
ChyronHego continues to invest in research and development of current and emerging technologies that it deems critical to maintaining its competitive position in the broadcast graphics and sports enhancement markets. During 2013 and 2012, we spent approximately $9.2 million and $7.4 million, respectively, for research and development for new and existing products, all of which is company funded.
The broadcast industry is a complex environment that is rapidly changing with new consumer patterns and constantly evolving technology. Our main strategic objective is to be at the forefront of the technology development and to ensure that our product and services portfolio and product roadmap are world leading. There are a number of key market trends that are used in guiding our management with its strategic direction, including the following:
| | · | Video consumption is growing, which implies that more content will have to be created; |
| | · | Live programming cannot be downloaded; |
| | · | Sports is growing in popularity; |
| | · | Handling of large amounts of data is becoming ever more important; |
| | · | In-content advertising is growing in importance; and |
| | · | Outsourcing is increasing among broadcasters. |
We believe our product and services portfolio is very well positioned to capitalize on the market trends mentioned above.
Sales and Marketing
We market our products and systems to traditional broadcast, production and post-production facilities and to multimedia outlets such as web, mobile and print companies throughout the world. We also market our products and services in these markets to sports networks and arenas, government agencies, educational institutions, health institutions, religious institutions and telecommunications and corporate customers. The objective of our marketing is to increase product visibility, product differentiation, brand awareness and to increase market acceptance of our products. In order to maintain and increase awareness of our products, we display them at the major domestic and international trade shows held by groups involved with the broadcast and post-production segments of the industry.
We also promote our products through email campaigns, webinars, advertisements placed in relevant journals and online sites, our website, ChyronHego storytellers, our customer testimonial video series, industry associations, such as the Sports Video Group, knowledge base and forum, and social media marketing venues such as Facebook®, Twitter®, LinkedIn, Google+®, and YouTube®. In addition, our engineering and corporate staff publish articles, present papers, and are quoted in trade journals and papers presented at technical conventions, which we believe reinforces and promotes our industry credentials.
Our aim is to continue to expand the range and sophistication of our marketing tools. We offer marketing and instructional podcasts on our website, and we continually refresh our library of tutorials, white papers, workflow diagrams and system diagrams. Periodically, we send an electronic marketing package highlighting a product or product line to clients and potential clients. A critical component of our sales strategy is the development of effective product and workflow demonstrations. We believe that the ability to conduct successful demonstrations is important in proving the reliability and innovation of our products, and results in the retention of existing customers and the acquisition of new business. We also perform online video demonstrations which have become a valuable and cost-saving marketing tool for us. Additionally, we aim to expand the ChyronHego brand throughout the globe and to increase our international footprint and position.
Sales of our broadcast products worldwide are made through our direct sales personnel as well as through third-party dealers, independent representatives and systems integrators. Direct sales, marketing and product specialists serving our global markets act as links between the customer and our development team.
Service and Support
We offer technical service and support to our customers via 24-hours-per-day, seven-days-per-week, 52-weeks-per-year access to highly trained service and support professionals. We employ online video conferencing to help customers resolve problems and update software on their systems, speeding resolution and cutting costs. We have instituted an on-line case submission system, which enables our customers to submit a case to the support team and provides them with a "help desk at their fingertips" via the web. We provide a searchable knowledge base which is continually updated with current information. Service is provided both domestically and internationally by ChyronHego or through our appointed dealers and representatives.
Proper training is essential for the success of our customers. We offer a comprehensive course catalog, with scalable and fixed-duration training courses tailored to varying levels of proficiency and generally consisting of a mix of classroom discussions and hands-on training. Training courses are held at our Melville, NY headquarters or on site at the customer's facility, as required. We make training available to a wider user base by offering online video conferencing courses in which users can participate in interactive instruction.
We provide our customers with hardware, software and performance maintenance contracts and spare parts. We believe that support contracts and an easily available spare parts supply facilitate customer satisfaction. We generally provide one-year warranties on all of our products. There may be, in certain instances, exceptions to these terms. A provision is made in our consolidated financial statements to estimate the warranty cost in products sold based on historical actual results.
Manufacturing
Our final assembly, system integration and test operations are located at our headquarters in Melville, NY. We use third-party vendors to manufacture and supply many of our hardware components and sub-assemblies. We rely on a limited number of suppliers for major hardware components. We continually review product specifications in order to diversify the sourcing of critical components. With our current architecture, we use many "off-the-shelf" components. This not only permits us greater flexibility in sourcing of components, but also provides higher gross margins on our products due to lower costs achieved through competitive sourcing and greater commonality of components among our products.
Customers
There were no customers that individually represented in excess of 10% of our consolidated revenues for 2013 or 2012.
Competition
The markets for our products are highly competitive and are characterized by rapid technological change and evolving industry standards. Product obsolescence, frequent development of new products, new technologies and significant price erosion are all features of the industry in which we operate.
The explosion of alternative media outlets, characterized by the accelerated use of online and social media resources for information, entertainment and business and the ubiquitous presence of personal mobile devices, has opened new markets for us and our competitors. We have aggressively pursued these opportunities by providing our clients with the ability to create and distribute media assets from any web access point, with an integrated environment that we believe is not available from our competitors.
We are currently aware of several major and a number of smaller competitors. We believe the competitive factors in our market include product pricing, features, ease of implementation and use, integration with workflow and third-party systems, and the quality of customer support. We believe our primary competitors are Vizrt Limited AG, Harris Corporation's Inscriber subsidiary, Miranda Technologies, Pixel Power, Orad Hi-Tec Systems Ltd., Avid Technology, Inc. and Ross Video Ltd. Some of these companies have significantly greater financial, technical, manufacturing and marketing resources than we have. On a region-by-region basis, certain product categories or market segments in which we operate, or may operate, are dominated by established vendors.
Intellectual Property
Our success depends upon our ability to protect our proprietary intellectual property, technology and know-how and operate without infringing on the rights of others. We rely on a combination of methods to protect our proprietary intellectual property, technology and know-how, such as trade secret laws, trademark law, patent law, contractual provisions, confidentiality agreements and certain technology and security measures.
We have been awarded patents in the United States and Great Britain for incorporating graphics and interactive triggers in a video stream which expire in 2024 and 2021, respectively.
Trademarks currently owned and used include: ChyronHego, The Company The Whole World Watches, Axis World Graphics, BlueNet, HyperX, TRACAB, Lyric, CAMIO, MediaMaker, ENGAGE, SHOUT, Intelligent Interface, WAPSTR, ChyTV and ChyAlert. We review our trademark registrations regularly and renew the terms if we deem appropriate based on current usage of the respective trademark. We also have rights in trademarks and service marks that are not federally registered. We do not have registered copyrights on any of our intellectual property.
Government Regulation
The telecommunications and television industries are subject to extensive regulation in the United States and other countries. For example, the FCC has issued regulations relating to shielding requirements for electromagnetic interface in electronic equipment. Our products are in compliance with these regulations.
In addition, we ensure that our products are in compliance with Restriction of Hazardous Substances (RoHS) regulations, which were implemented in the European Union. Maintaining compliance involves providing such specifications to the manufacturers of our proprietary components, as well as acquiring certifications of compliance from our third-party vendors.
Substantially all of our manufacturing is outsourced and we purchase completed components and assemblies from our suppliers. Consequently, our processes do not involve hazardous substances and we have not incurred and do not anticipate incurring any expenses associated with environmental laws.
Employees
As of December 31, 2013, we employed approximately 190 persons worldwide.
About the Company
ChyronHego Corporation was incorporated under the laws of the State of New York on April 8, 1966. Our principal executive offices are located at 5 Hub Drive, Melville, New York 11747 and our telephone number is (631) 845-2000.
We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any documents filed by us at the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings with the SEC are also available to the public through the SEC's website at http://www.sec.gov.
We maintain Internet sites at www.chyronhego.com, www.chytv.com, www.axisgraphics.tv, www.sportsground.se, and www.sportsground.tv. We make available, free of charge, through the "Investors" section of our www.chyronhego.com website, our SEC filings as soon as reasonably practicable after these reports have been electronically filed with or furnished to the SEC. Our websites and the information contained on them or connected to them shall not be deemed to be incorporated by reference into this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
A wide range of factors could affect our business and financial results. We consider the factors described below to be the most significant. There may be other currently unknown or unpredictable economic, business, competitive or other factors that could have material adverse effects on our business, financial condition and results of operations. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. The following discussion of risk factors contains "forward-looking statements," as we discuss under the heading "Special Note Regarding Forward-Looking Statements," and should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes in this Annual Report on Form 10-K.
Risks Related to Our Business
We may not realize the benefits of the merger with Hego because of integration difficulties.
It may not be possible to realize the full benefits that we anticipated will result from the May 2013 merger with Hego. Integrating the operations of Hego successfully or otherwise realizing any of the anticipated benefits of the transaction with Hego, including anticipated cost savings and additional revenue opportunities, involves a number of challenges. The failure to meet these integration challenges could seriously harm our results of operations and the market price of our common stock may decline as a result.
Realizing the benefits of the transaction will depend in part on the integration of information technology, operations, personnel and sales forces. These integration activities are complex and time-consuming and we may encounter unexpected difficulties or incur unexpected costs, including:
| · | our inability to achieve the cost savings and operating synergies anticipated in the transaction, which would prevent us from achieving the positive earnings gains expected as a result of the transaction; |
| · | diversion of management attention from ongoing business concerns to integration matters; |
| · | difficulties in consolidating and rationalizing information technology platforms and administrative infrastructures; |
| · | complexities in managing a significantly larger company than before the completion of the transaction; |
| · | complexities associated with managing the combined businesses and consolidating multiple physical locations where management may determine consolidation is desirable; |
| · | difficulties in the assimilation of Hego employees and the integration of two business cultures; |
| · | challenges in combining product offerings and sales and marketing activities; |
| · | challenges in demonstrating to our customers and to customers of Hego that the transaction will not result in adverse changes in customer service standards or business focus; and |
| · | possible cash flow interruption or loss of revenue as a result of change of ownership transitional matters. |
We may not successfully integrate the operations of the businesses of Hego in a timely manner, and we may not realize the anticipated net reductions in costs and expenses and other benefits and synergies of the transaction of Hego to the extent, or in the timeframe, anticipated. In addition to the integration risks discussed above, our ability to realize these net reductions in costs and expenses and other benefits and synergies could be adversely impacted by practical or legal constraints on our ability to combine operations. As a non-public, non-U.S. company, Hego did not have to comply with the requirements of the Sarbanes-Oxley Act of 2002 for internal control and other procedures. Bringing Hego's systems into compliance with those requirements may cause us to incur substantial additional expense. In addition, the integration process may cause an interruption of, or loss of momentum in, the activities of our business. If our management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer and our results of operations and financial condition may be harmed.
Current and future economic conditions may adversely affect our business and customers.
The United States and other countries in which we operate continue to struggle to emerge from economic recessions. This could adversely affect overall spending on technology and services and reduce demand or delay payments for our products and services. The continuing unfavorable economic environment may also cause our customers to have difficulty obtaining capital at adequate or historical levels to finance their ongoing business and operations and our customers may face insolvency, all of which could impair their ability to make timely payments and continue operations. Further, we may experience supply chain delays, disruptions or other problems associated with financial constraints faced by our suppliers and subcontractors. We are unable to predict the duration and severity of the weakened economic conditions and such conditions could adversely impact our business, operating results and financial condition.
Our revenues may fluctuate from period to period and therefore may fail to meet expectations, which could have a material adverse effect on our business, financial condition and results of operations.
Our revenues have fluctuated in the past and may do so in the future. In addition, our revenues may not follow any past trends. Our financial results depend on many factors and may fail to meet our expectations for a number of reasons. A variety of factors could cause our revenues to fluctuate, including decreased capital spending by our customers, the financial health of our customers, changes in customer demand for our products, changes in our product mix, the need for continual, rapid new product introductions, our degree of success in executing our strategy to develop and market web-based content creation solutions, quality and market acceptance of new products and services, competitive pricing pressures, the cyclical nature of the broadcast industry and other markets in which our products and services are sold, and economic conditions affecting our customers and us. Any failure to meet expectations could have a material adverse effect on our business, financial condition and results of operations.
If we fail to successfully continue to develop, introduce and sell new products and services, then we may be unable to compete effectively in the future.
We operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products. Our future success depends on our ability to develop, introduce and successfully market our workflow and order management system, other new products employing the latest technologies, our production and timing and data services, and development services for custom high performance solutions that meet the rapidly evolving requirements of our customers. Our success increasingly depends on the ability to cement our position in new segments of the broadcast market. If any of the following occur, then our business, financial condition and results of operations may be materially harmed:
| | · | we fail to complete and introduce new product designs and services in a timely manner; |
| | · | we are unable to have these new products manufactured or developed according to design specifications; |
| | · | our customers do not perceive value in our new offerings and demand deep discounts; |
| | · | we do not open the appropriate marketing/sales channels for our products and services; |
| | · | our sales channels do not create adequate demand for our products and services; or |
| | · | market demand for our new products and services does not develop as anticipated. |
If we are unable to keep up with rapid change in our industry, our business may suffer.
The markets for our products are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions, enhancements and changes in workflow by our customers, our customers' other vendors and our competitors. Due to technological advancements and changes in industry standards, our products may become obsolete or the prices at which we can sell them may decline. Future technological advances in the television, video and multimedia industries may result in the availability of new products or services that could compete with our products or require us to reduce the price of our existing products or services. The availability of competing or less expensive products could cause our
existing or potential customers to fulfill their needs more effectively and cost-efficiently with products other than ours.
We may not be successful in enhancing our products and services or in developing, manufacturing or marketing new products that satisfy customer needs or achieve market acceptance. In addition, services, products or technologies developed by others may render our products or technologies uncompetitive, unmarketable or obsolete. Announcements of currently planned or other new product offerings by either our competitors or us may cause customers to defer or fail to purchase our existing products or services.
In addition, it is possible that errors or failures may be found in our products. Such errors or failures could cause delays in product introductions and shipments or require design modifications that could adversely affect our sales and our competitive position and could increase warranty claims. This could result in an increase in the inventory of our products. If we do not develop, on a timely basis, new products and enhancements to existing products, or correct errors should they arise, or if such new products or enhancements do not achieve market acceptance, then our business, financial condition and results of operations may suffer. Furthermore, the trend toward the use of software-based and web-based solutions, including our own hosted services, may cause price erosion in our legacy products, create opportunities for new competitors, allow existing competitors enhanced opportunities and limit the sale of our proprietary systems.
We expend substantial resources in developing and selling our products and services, and we may be unable to generate significant revenue as a result of these efforts.
To establish market acceptance of our products and services, we must dedicate significant resources to research and development, production, and sales and marketing. We experience a delay between the time when we expend these resources and the time when we begin to generate revenue, if any, from these expenditures. We record as expenses the costs related to the development of new products as these expenses are incurred. As a result, our profitability from quarter to quarter and from year to year may be materially and adversely affected by the number and timing of sales of our existing products and our new product introductions in any period, and the level of acceptance gained by these products.
Our results of operations could be adversely affected by impairments of goodwill or other long-lived assets and intangible assets.
We recorded $27.9 million of goodwill and intangible assets on our balance sheet as of December 31, 2013. Goodwill is not amortized, but instead must be tested at least annually for impairment by applying a fair-value-based test. Goodwill is deemed impaired to the extent that its carrying amount exceeds the fair value of the reporting unit. Although our latest tests indicate that no goodwill impairment is currently required, future deterioration in market conditions could lead to goodwill impairments that could have a negative effect on our results of operations.
We have incurred net losses in recently completed fiscal years and we may continue to incur net losses in future periods.
The losses that we have incurred in recently completed fiscal years, among other things, adversely affect our shareholders' equity and working capital. These losses, and the principal factors or components underlying them, are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Annual Report on Form 10-K. We cannot be certain when, or if, our operations will be profitable or, if we become profitable whether profitability can be sustained.
We will be unable to compete effectively if we fail to anticipate product opportunities based upon emerging technologies and standards and fail to develop products and services that incorporate these technologies and standards.
We may spend significant time and money on research and development to design and develop products and services around an emerging technology or industry standard. If an emerging technology or industry standard that we have identified fails to achieve broad market acceptance in our target markets, then we may be unable to generate significant revenue from our research and development efforts. Moreover, even if we are able to develop products using adopted standards, then our products may not be accepted in our target markets. As a result, our business, financial condition and results of operations would be materially harmed.
If systems manufacturers move away from the use of industry standards that we support with our products and adopt alternative standards, then we may be unable to design and develop new products that conform to these new standards. The expertise required is unique to each industry standard, and we would be required to either hire individuals with the requisite expertise or acquire this expertise through a licensing arrangement or by other means. The demand for individuals with the necessary expertise to develop a product relating to a particular industry standard is generally high, and we may not be able to hire such individuals. The cost to acquire this expertise through licensing or other means may be high and such arrangements may not be possible in a timely manner or on commercially reasonable terms, if at all.
Since most of our systems are Microsoft® Windows®-based, we are vulnerable to issues that arise, both anticipated and unanticipated, whenever a current version of Windows is updated or a new version of Windows is released. When a Windows update is released, Lyric, other ChyronHego applications and/or the graphics systems of our customers may fail to function correctly or at all. Consequently, we incur expenditures conducting an investigation and subsequently, devising a solution. This can be a time- and capital-consuming process. When a new version of Windows is released, we are forced, against our schedule, to rigorously test all of our software and systems using the new version, investigate malfunctions and re-engineer our software where necessary. This financial and labor expenditure is required in order for us to have the ability to officially represent our software and systems as supporting a specific version of Windows. Our revenues and our market share will decline if we do not continue to develop and exploit the compatibility of our products with Windows. Most of our systems ship with Windows 7 or Windows server versions that are currently supported with no end of life timelines.
Windows 8, has not yet been validated with our proprietary systems, although it can be used with selected offline software and hosted applications
Because we rely on the implementation of our software and services in Windows and other operating systems, we are exposed to the vagaries of individual systems or installations in which hardware and/or software may interfere with the operation of our software and systems, or be interfered with by our software and/or systems, and our systems may face exposure to computer viruses. For example, because our Axis World Graphics applications are accessed via an Internet web browser, we are required to test Axis within multiple web browsers including Internet Explorer® and Safari® running on both current and legacy Windows and Apple® operating systems. We may spend a significant amount of time and resources ensuring that Axis functions properly on a wide range of systems and within the various operating systems and browsers, and making necessary revisions to Axis to enable compatibility with new versions of these systems. Commissioning our systems, software and services in these situations can consume time and resources beyond original estimates and consequently reduce our profit margins. If we are unable to continue offering our products on the latest versions of these browsers and operating systems, then we will not be able to generate sales of these products, and our business, financial condition and results of operations will be harmed.
We may not successfully develop strategic relationships that may be important to our business.
We believe the formation of strategic relationships will be important to our broadcast offerings. The inability to find strategic partners or the failure of any existing relationships to achieve meaningful positive results for us could harm our business. We rely in part on strategic relationships to help us:
| | · | maximize visibility and adoption of our products and services through distribution arrangements; |
| | · | expand the range of commercial activities based on our technology; and |
| | · | increase the performance, functionality and utility of our products and services. |
Many of these goals have historically been beyond our traditional strengths. Going forward, we anticipate that we may become more reliant on strategic partners to provide multimedia content and build the necessary infrastructure for media delivery. In addition, the efforts of our strategic partners may be unsuccessful. Furthermore, these strategic relationships may be terminated before we realize any benefit.
We operate in a highly competitive environment and industry and we may lack the resources needed to capture increased market share.
We may not be able to compete successfully against our current or future competitors. The markets for digital and broadcast graphics products and services are highly competitive. These markets are characterized by constant technological change and evolving industry standards. Most of our competitors have significantly greater financial, technical, manufacturing and marketing resources than we have. In addition, certain vendors dominate certain product
categories and market segments, on a region-by-region basis, in which we currently operate or may wish to operate in the future. As a result, our ability to compete and operate in these areas may be limited.
We believe that our ability to compete depends on factors both within and outside of our control, including the success and timing of new product and service offerings introduced by us and by our competitors, product performance and price, market presence and customer support. We may not be able to compete successfully with respect to these factors. Maintaining any advantage that we may have, now or in the future, over our competitors will require our continuing investments in research and development, acquisition and retention of highly skilled personnel, competitive analyses, sales and marketing and customer service and support. In addition, as we enter new markets, we may encounter distribution channels, technical requirements and competitive factors that differ from those in the markets in which we currently operate. We may not be able to compete successfully in these new markets. Increased competition in any of our current markets could also result in price reductions, reduced margins or loss of market share, any of which could harm our business, financial condition and results of operations.
We depend on a limited number of suppliers for several key components, which makes us susceptible to shortages or price fluctuations in our supply chain.
During periods of high demand for electronic products, component shortages are possible, and the predictability of the availability of such components may be limited. If shortages persist, the price of these components may increase, or the components may not be available at all. We may not be able to secure enough components at reasonable prices or of acceptable quality to build our products in a timely manner, and our revenues and gross margins could suffer until other sources can be developed. In addition, certain of our key components are purchased from a limited number of suppliers. The development of alternate sources for those components is time-consuming, difficult, and costly. Furthermore, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. In the event of a component shortage or supply interruption from our suppliers, we may not be able to develop alternate or second sources in a timely manner. If we are unable to buy these components in quantities sufficient to meet our requirements on a timely basis, we will not be able to deliver product to our customers, which would materially harm our business, financial condition and results of operations.
We may be impacted by new regulations related to conflict minerals.
In August 2012, the SEC adopted new rules establishing disclosure and reporting requirements regarding the use of certain minerals referred to as "conflict minerals" in products. These new rules will require us to determine, disclose and report whether or not such conflict minerals originate from the Democratic Republic of the Congo or adjoining countries. In addition, these new rules could affect our ability to source certain materials used in our hardware products at competitive prices and could impact the availability of certain minerals used in the manufacture of our hardware products. Our customers may require that our hardware products be free of conflict minerals, and our revenues may be harmed if we are unable to procure conflict-
free minerals at a reasonable price. We also expect that there may be costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs related to possible changes to our hardware products, processes or sources of supply as a consequence of such disclosure and reporting requirements.
Our business will suffer if our network systems fail or become unavailable or if security breaches and other disruptions compromise our information.
In the ordinary course of our business, we collect and store sensitive data in our data centers and on our networks, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees. A reduction in the performance, reliability and availability of our network infrastructure would harm our ability to distribute our products and services to our users, as well as our reputation and ability to attract and retain users and content providers. Our systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, Internet breakdown, earthquake and similar events. Our systems could also be subject to viruses, break-ins, sabotage, acts of terrorism, acts of vandalism, hacking, cyber-terrorism and similar misconduct which could result in unintentional disclosure of proprietary, sensitive or confidential information. Such unauthorized access could expose us, our customers or the individuals to a risk of loss or misuse of information, resulting in litigation or potential liability for us. Although we offer redundant configurations for some of our systems and co-locations of our servers to protect our Axis World Graphics hosted services, we do not offer fully redundant configurations across the entire product line, nor do we have a formal disaster recovery plan. We might not carry adequate business interruption insurance to compensate us for losses that may occur from a system outage. Any system error or failure that causes interruption in availability of products or services or an increase in response time could result in a loss of potential or existing customers or content providers, which could have a material adverse effect on our business, financial condition and results of operations. If we suffer sustained or repeated interruptions, then our products and services could be less attractive to our users and our business would be materially harmed.
We depend upon third-party dealers to market and sell our products and services and they may discontinue sale of our products and services, fail to give our products and services priority or be unable to successfully market, sell and support our products and services.
During 2013, 21% of our sales were made to third-party dealers and independent representatives. Although we have contracts with our dealers and representatives, any of them may terminate their relationship with us on short notice. The loss of one or more of our principal dealers, or our inability to attract new dealers, could materially harm our business. We may lose dealers in the future and we may be unable to recruit additional or replacement dealers. As a result, our future performance will depend in part on our ability to retain our existing dealers and representatives and attract new dealers and representatives who will be able to sell and support our products and services effectively.
Problems associated with international business operations could subject us to risks from financial, operational and political situations, and affect our ability to manufacture and sell our products and services.
Sales to customers located outside the United States accounted for 47% of our total sales in 2013 and 33% of our total sales in 2012. The increased percentage is primarily a result of the merger with Hego, which, prior to the merger, derived 93% of its net sales in 2012 from sales of its products and services outside the United States. We anticipate that sales to customers located outside the United States will continue to represent a significant portion of our total sales in future periods. Accordingly, our operations and revenues are subject to a number of risks associated with foreign commerce, including the following:
| | · | managing foreign dealers and foreign customers, which may be state corporations or government agencies; |
| | · | differing local product preferences and product requirements; |
| | · | difficulty in staffing, training and managing foreign operations; |
| | · | differing legal regulations and labor relations; |
| | · | political and economic instability; |
| | · | trade protection measures, and timing and availability of import and export licenses; |
| | · | changes in laws, regulations and policies governing operations of foreign-based companies (including potentially negative consequences from changes in tax laws (including potential taxes payable on earnings of foreign subsidiaries upon repatriation), tariffs, environmental directives, freight rates and governmental royalties); |
| | · | inadequate protection of intellectual property rights in some countries; |
| | · | longer collection cycles for accounts receivable payment cycles and difficulties in enforcing contracts; |
| | · | obtaining governmental approvals for certain products; and |
| | · | technical standards which may differ and/or be more stringent that those of the United States, and would cause us to incur expenses associated with obtaining required certifications. |
In addition, we are subject to risks arising from currency exchange rate fluctuations, which could increase our costs and may adversely affect our results of operations. The U.S. dollar value of our foreign-generated revenues varies with currency exchange rate fluctuations. The majority of our foreign-generated revenues were generated in Europe. Significant increases in the value of the U.S. dollar relative to foreign currencies could have a material adverse effect on our results of operations.
Any of these factors may, individually or as a group, have a material adverse effect on our financial condition, results of operations and cash flows.
If we are not able to retain our current senior management team or continue to attract and retain qualified technical and business personnel, our business will suffer.
We depend on the members of our management team for our business success. The loss of any one member of our senior management team, including, in particular, Johan Apel, our
President and Chief Executive Officer, could result in a significant loss in the knowledge and experience that we, as an organization possess and could cause significant delays, or outright failure, in the development and commercialization of our products, and could hinder the operation of our business. We have an employment agreement with Mr. Apel, which extends through May 23, 2016. The agreement may be terminated by us or Mr. Apel, with or without consent. Mr. Apel is employed on an at-will basis pursuant to the employment agreement. Mr. Apel may be entitled to severance payments under certain circumstances. Mr. Apel is subject to change-in-control provisions pursuant to the employment agreement. Three other members of our senior management team are subject to employment agreements that expire in 2014 or 2016. The loss of the services of Mr. Apel or any member of our senior management team may delay or prevent us from achieving our objectives.
In addition, we believe our future success will depend upon our ability to attract and retain engineers and other highly skilled personnel and sales people. Most of our employees are at-will and only a few are subject to employment contracts. Hiring qualified sales and technical personnel will be difficult due to the limited number of qualified professionals. Competition for these types of employees is high. We have in the past experienced difficulty in recruiting and retaining qualified sales and technical personnel necessary for the development of our business. Failure to attract and retain personnel, particularly sales and technical personnel, would materially harm our business.
We may not be able to protect our proprietary technology and may be sued for infringing on the rights of others.
Protection of intellectual property rights is crucial to our business, because that is how we prevent others from copying innovations that are central to our existing and future products. Our success also depends, in part, upon our ability to operate without infringing upon the rights of others. We rely on a combination of methods to protect our proprietary intellectual property, technology and body of knowledge, such as:
| | · | confidentiality agreements; and |
| | · | certain technology and security measures. |
Because it is critical to our success that we are able to prevent competitors from copying our innovations, we intend to continue to seek patent and trade secret protection for our products where available and when we deem appropriate. The process of seeking patent protection can be long and expensive, and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. We also intend to continue to seek trademark status for our product/service brand names and
technologies, in order to prevent our competitors from co-opting these brand names for their own use.
Existing copyright, trademark, patent and trade secret laws afford only limited protection. Moreover, effective protection of copyrights, trade secrets, trademarks and other proprietary rights may be unavailable or limited in certain foreign countries and territories. Domestic and foreign laws, in combination with the steps we have taken to protect our proprietary rights, may not be adequate to prevent misappropriation of our technology or other proprietary rights. The steps we have taken regarding our proprietary technology may not be sufficient to deter misappropriation; for example, we have rights in trademarks, service marks and copyrights that are not registered. We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties; however, employees may breach these agreements, and we may not have adequate remedies for any breach. Also, the copyright, trademark, patent and trade secret laws we rely upon to protect our intellectual property do not preclude competitors from independently developing products with functionality or features similar or superior to our products and technologies, or designing around the patents we own or the technology we create.
In the systems and software industries, companies receive notices from time to time alleging infringement of patents, copyrights or other intellectual property rights of others. In the past we have been, and may from time to time continue to be, notified of claims that we may be infringing patents, copyrights or other intellectual property rights of third parties. Companies may pursue claims against us with respect to the alleged infringement of patents, copyrights or other intellectual property rights of third parties. In addition, litigation may be necessary to protect our intellectual property rights and trade secrets, to determine the validity of and scope of the proprietary rights of others or to defend against third-party claims of infringement. Any litigation could result in substantial costs and diversion of resources from the day-to-day operation of our business.
If a new law or regulation is adopted pertaining to the telecommunications and television industries, it could harm our customers' business, which could have a material adverse effect on our business, financial condition and results of operations.
The enactment by U.S. federal or state or international governments of new laws or regulations, changes in the interpretation of existing regulations or a reversal of the trend toward deregulation in these industries could cause our customers to suffer, and thereby adversely affect our business, financial condition and results of operations. Television operators are subject to extensive government regulation by the FCC and other U.S. federal and state regulatory agencies. These regulations could limit capital expenditures by television operators and if that occurs, our business, financial condition and results of operations may suffer.
The telecommunications and television industries are subject to extensive regulation in the United States and other countries. Our business is dependent upon the continued growth of these industries in the United States and internationally. Recent legislation has lowered the legal barriers to entry for companies into the United States' multi-channel television market, but telecommunications companies may not successfully enter this or related markets. Moreover, the
growth of our business internationally is dependent in part on similar deregulation of the telecommunications industry abroad and such deregulation may not occur.
We are uncertain of our ability to obtain financing for our future needs, and liquidity issues have and may continue to increase our cost of capital.
At December 31, 2013, we had cash and cash equivalents of $5.3 million and working capital of $1.2 million. We entered into a two-year credit facility with a U.S. bank in November 2013. The credit facility provides for a $4.0 million revolving line of credit with an advance rate of the lesser of $4.0 million or 80% of eligible accounts receivable, less the amount outstanding under the credit facility. We also have revolving credit facilities associated with our European operations that total $1.3 million, of which $0.9 million was outstanding at December 31, 2013. These revolving credit facilities have expiration dates of December 31, 2014 and automatically renew for twelve month periods unless notified by the lender ninety days prior to expiration. We believe that cash on hand, net cash expected to be generated in the business, and the amount available under our lines of credit, will be sufficient to meet our needs for at least the next twelve months if we are able to achieve our planned results of operations and retain the availability of credit under our credit facilities. However, we may need to raise additional funds in order to fund our business, expand our sales and marketing activities, develop or enhance new products and services, respond to competitive pressures and satisfy our existing and any new obligations that may arise. We could be in default under our U.S. credit facility with our bank if: (i) we fail to make payment of principal and interest when due; (ii) we fail to provide to our bank required financial statements, reports and certificates; fail to timely file all required tax returns and pay timely; fail to maintain required insurance policies at levels acceptable to the bank; fail to maintain our primary operating bank accounts with the bank; fail to meet our financial covenants; or fail to comply with the required negative covenants; (iii) we incur a material adverse change in our business, operations or condition; if there is a material impairment in the perfection or priority of the bank's lien on the collateral supporting the credit facility; if there is a material impairment of the prospect of repayment of our obligations to the bank; or the bank determines that there is a reasonable likelihood that we will fail to comply with one or more of our financial covenants in the succeeding financial reporting period; (iv) we become insolvent; (v) are issued a judgment for payment of $100,000 or more net of insurance recovery if any; and (vi) other events of default as described in our Amended and Restated Loan and Security Agreement, as amended, with our bank. In the event of default, the bank's remedies include any or all of the following: (i) declare all outstanding obligations to the bank, due and payable; (ii) stop advances or credit under the credit facility; (iii) require that we deposit cash in an amount of at least 105% of the dollar amount of any outstanding letters of credit; (iv) terminate any foreign exchange contracts; (v) dispose of collateral adequate to repay the bank any amounts owed to it; and (vi) take additional measures, as outlined in the Loan and Security Agreement, as amended, to protect the bank's interests. Additional financing may not be available on terms favorable to us, or at all. Capital is critical to our business, and our ability to raise capital in the event that losses use our available cash would have a material adverse effect on our business, financial condition and results of operations.
Significant changes in discount rates, the actual return on pension assets and other factors could adversely affect our business, financial condition and results of operations.
Our business, financial condition and results of operations may be negatively impacted by the amount of expense recorded related to our qualified pension plan. Accounting principles generally accepted in the United States ("GAAP") require that income or expense related to the pension plan be calculated at the annual measurement date using actuarial calculations, which reflect certain assumptions. The most significant of these assumptions relate to interest rates, the capital markets and other economic conditions. Changes in key economic indicators can change these assumptions. These assumptions, as well as the actual value of pension assets at the measurement date, will impact the calculation of pension expense for the year. Although GAAP expense and pension contributions are not directly related, the key economic indicators that affect GAAP expense also affect the amount of cash that we will contribute to our pension plan. Because the values of these pension assets have fluctuated and will continue to fluctuate in response to changing market conditions, the amount of gains or losses that will be recognized in subsequent periods, the impact on the funded status of the pension plan and the future minimum required contributions, if any, could adversely affect our business, financial condition and results of operations.
Our principal shareholders have significant voting power and may vote for actions that may not be in the best interests of our shareholders.
Our officers, directors, their affiliates and 5% or more shareholders, together control approximately 50% of our outstanding common stock (not including options or other convertible securities) as of February 28, 2014. The interests of this group of stockholders may not always coincide with our corporate interests or the interests of other stockholders, and they may act in a manner with which you may not agree or that may not be in the best interests of other stockholders. This concentration of ownership may have the effect of:
| | · | delaying, deferring or preventing, or alternatively, accelerating or causing, a change in control of our company; |
| | · | entrenching our management and/or Board of Directors; |
| | · | impeding a merger, consolidation, takeover or other business combination involving our company; or |
| | · | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company. |
We increased the level of our insurance coverage following the completion of the merger with Hego; however, future claims could exceed our applicable insurance coverage.
ChyronHego maintains insurance for property and general liability, directors' and officers' liability, products liability, workers compensation and other coverage in amounts and on terms deemed adequate by management based on our expectations for future claims. Although we increased the level of our insurance coverage, particularly our directors' and officers' liability insurance, following the completion of the merger with Hego, future claims could exceed our
applicable insurance coverage, or in some instances our coverage may not cover the applicable claims.
Risks Related to Our Common Stock
Raising additional capital may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to our technologies.
Following the Hego merger, we continue to require significant working capital for operations and marketing and research and development activities as well as the expansion and integration of our operations. We may seek additional capital through a combination of private and public equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market our products that we would otherwise prefer to develop and market ourselves.
An increase in the number of shares of our common stock outstanding could reduce the price of our common stock.
At December 31, 2013, there were 6.0 million potentially dilutive shares that would be issuable if all outstanding common stock options were exercised, plus an additional 1.4 million shares available for grant under our stock incentive plan. Issuance or sale of a substantial number of shares of additional common stock, or the perception that such issuance or sales could occur, could adversely affect the market price for our common stock as it would result in additional shares of our common stock being available on the public market. These issuances or sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate your ability to sell your shares for a premium in a change of control transaction.
Various provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws, as amended, and New York corporate law may discourage, delay or prevent a change in control or takeover attempt of our company by a third party that is opposed to by our management and board of directors. Shareholders who might desire to participate in such a transaction may not have the opportunity to do so. These anti-takeover provisions could substantially impede the ability of shareholders to benefit from a change of control or change in our management and board of directors. These provisions include:
| | · | authorizing the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number of outstanding shares, issue shares of stock with voting, liquidation and other rights in preference to the rights of common shareholders and thwart a takeover attempt; |
| | · | limiting who may call special meetings of our shareholders; and |
| | · | establishing advance notice requirements for nominations of candidates for election to our board of directors, or for proposing matters that can be acted upon by our shareholders at shareholder meetings. |
If we fail to continue to meet all applicable NASDAQ Global Market requirements and the NASDAQ Stock Market determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, impair the value of your investment, and harm our business.
Our common stock is currently listed on the NASDAQ Global Market. We have previously received notifications from NASDAQ informing us of certain listing deficiencies, including failure to satisfy the minimum bid price and the minimum stockholders' equity requirements. Although we have since cured these deficiencies, it is possible that we could fall out of compliance again in the future. If we fail to maintain compliance with any listing requirements, we could be delisted and our common stock would be considered a penny stock under regulations of the SEC and would therefore be subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities. The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of the common stock and your ability to sell our securities in the secondary market.
The price of our common stock may be volatile.
The trading price of our common stock has been and may continue to be subject to fluctuations in response to quarter-to-quarter variations in our liquidity and operating results, changes in earnings estimates by analysts, general conditions in the digital media industry, announcements of technological innovations or new products or services introduced by us or our competitors, and other events or factors. The stock market in general, and the shares of technology companies in particular, have experienced extreme price fluctuations in recent years. During the period commencing January 1, 2012, through February 28, 2014, the price of our common stock has ranged between $0.48 and $3.12. This volatility has had a substantial impact on the market prices of securities issued by many companies for reasons unrelated to the operating performance of the companies affected. These broad market fluctuations may adversely affect the market price of our common stock.
Subject to certain limitations, the former Hego shareholders may sell our common stock beginning on August 22, 2014, which could cause our stock price to decline.
The shares of our common stock that the former Hego shareholders received following the merger are subject to certain transfer restrictions until August 22, 2014. The sale of a
substantial number of our shares by the former Hego and Hego Trac shareholders or our other stockholders within a short period of time could cause our stock price to decline, make it more difficult for us to raise funds through future offerings of our common stock or acquire other businesses using our common stock as consideration.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive offices and principal office are located in Melville, New York, pursuant to a lease that expires on July 31, 2019. The Melville facility consists of approximately 47,000 square feet and is used for manufacturing, research and development, marketing and the executive offices. Our European operations are headquartered in Stockholm, Sweden, pursuant to a lease of approximately 9,000 square feet (primarily office space) that expires in June 2019. The Company does not own any real property. The Company's other locations are subject to leases with customary terms and conditions. We believe that our facilities are suitable for our existing operations and do not foresee the need for any significant expansion.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any legal proceedings that we believe will have a material impact on our business, financial condition, results of operations or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
| | ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED |
| | SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY |
Market Information
Our common stock trades on The NASDAQ Global Market under the symbol "CHYR." The high and low sales prices of the Company's common stock, as reported by NASDAQ, for each full quarterly period for the two most recent fiscal years, were as follows:
Price Range of Common Stock
| | High | Low |
| Year ended December 31, 2013 | | |
| Fourth quarter | $2.71 | $1.47 |
| Third quarter | 1.78 | 1.38 |
| Second quarter | 1.77 | 1.12 |
| First quarter | 1.64 | 0.64 |
| | | |
| Year ended December 31, 2012 | | |
| Fourth quarter | $1.02 | $0.48 |
| Third quarter | 1.42 | 0.80 |
| Second quarter | 1.90 | 1.33 |
| First quarter | 2.00 | 1.33 |
Shareholders
As of February 28, 2014, there were approximately 7,000 shareholders of record of our common stock.
Dividends
We have not declared or paid any cash dividends since 1989. We currently plan to retain any future earnings, for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. In addition, under the credit agreement with our U.S. lender, we are not permitted to pay any dividends without the bank's consent.
Unregistered Sales of Equity Securities
In May and October of 2013, we issued 12,199,431 and 413,324 shares, respectively, of our common stock in private transactions in connection with our acquisitions of Hego Aktiebolag and the minority interest in its subsidiary, Hego Trac Aktiebolag. These issuances of shares of common stock were not registered under the Securities Act of 1933, as amended (the "Securities Act") in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act.
Issuer Purchases of Equity Securities
None.
Stock Performance Graph
The graph below matches the cumulative 5-Year total return of holders of our common stock with the cumulative total returns of the Russell MicroCap index and a customized peer group of two companies that includes: Avid Technology, Inc. and VIZ RT Limited AG. The graph assumes that the value of the investment in our common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on 12/31/2008 and tracks it through 12/31/2013.
| | | | | | | |
| | 12/08 | 12/09 | 12/10 | 12/11 | 12/12 | 12/13 |
| ChyronHego Corporation | 100.00 | 138.67 | 146.67 | 92.67 | 47.33 | 141.33 |
| Russell MicroCap | 100.00 | 127.48 | 164.30 | 149.06 | 178.50 | 259.92 |
| Peer Group | 100.00 | 127.81 | 155.28 | 89.01 | 88.15 | 105.90 |
| | | | | | | |
| | | | | | | |
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
The performance graph shall not be deemed to be incorporated by reference by means of any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate such information by reference, and shall not otherwise be deemed filed under such acts.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this Item is omitted in reliance upon Item 301(c) of Regulation S-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K, including, without limitation, Management's Discussion and Analysis of Financial Condition and Results of Operations, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend that the forward-looking statements be covered by the safe harbor for forward-looking statements in the Exchange Act. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are usually accompanied by words such as "believe," "anticipate," "plan," "seek," "expect," "intend" and similar expressions.
Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward looking statements due to a number of factors, including, but not limited to: current and future economic conditions that may adversely affect our business and customers; our revenues and profitability may fluctuate from period to period and therefore may fail to meet expectations, which could have a material adverse effect on our business, financial condition and results of operations; our ability to maintain adequate levels of working capital; our ability to successfully maintain the level of operating costs; our ability to obtain financing for our future needs should there be a need; our ability to incentivize and retain our current senior management team and continue to attract and retain qualified scientific, technical and business personnel; our ability to expand our Axis online graphics creation solution or to develop other new products and services; our ability to generate sales and profits from our Axis online graphics services, workflow and asset management solutions; our ability to integrate the business of Chyron and Hego; our ability to grow sales and profits from our Hego products and services; our ability to develop new Hego products and services; rapid technological changes and new technologies that could render certain of our products and services to be obsolete; competitors with significantly greater financial resources; new product and service introductions by competitors; challenges associated with expansion into new markets; and other factors set forth in Part I, Item 1A, entitled "Risk Factors." Those factors as well as other cautionary statements made in this Annual Report on Form 10-K, should be read and understood as being applicable to all related forward-looking statements wherever they appear herein. The forward-looking statements contained in this Annual Report on Form 10-K represent our judgment as of the date hereof. We encourage you to read those descriptions carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this
report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law.
Such forward-looking statements are not guarantees of future performance and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements. In this report, "ChyronHego," the "Company," "we," "us," and "our" refer to ChyronHego Corporation and "Hego" or "Hego AB" refers to Hego Aktiebolag.
Overview
On May 22, 2013 we acquired the outstanding stock of Hego AB, and changed our name to ChyronHego Corporation. The acquisition of the Hego business provides us with very strong sports products and service offerings that address the needs of both sports broadcasters and sports leagues and rights holders. The Chyron and Hego product lines are complementary with very little overlap. Hego's solutions and services predominantly address the needs of live sports production, while Chyron has recently been more focused on graphics solutions for live and near-live news production workflows. There are significant budgets available in the sports TV space for those companies who offer an improved viewer experience, and we believe that we will be positioned to benefit from these kinds of expenditures. Ultimately, we believe that the business combination of Chyron and Hego has placed us in the position of a global leader in broadcast graphics creation, playout and real-time data visualization.
The results of operations include the operating results of Hego since completion of the business combination on May 22, 2013. The combination of these two companies is referred to in Management's Discussion and Analysis of Financial Condition and Results of Operations as the "Business Combination."
Results of Operations
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Net sales. Revenues for the year ended December 31, 2013 were $47.4 million, an increase of $17.2 million, or 57%, from the $30.2 million reported in the year ended December 31, 2012. Of these amounts, North American revenues were $26.3 million in the year ended December 31, 2013 and $21.2 million in the year ended December 31, 2012. Revenues derived from other international regions were $21.1 million in the year ended December 31, 2013 as compared to $9.0 million in the year ended December 31, 2012.
Revenues by type are as follows (dollars in thousands):
| | Year Ended December 31, |
| | | % of | | % of |
| | 2013 | Total | 2012 | Total |
| Product | $27,136 | 57% | $21,674 | 72% |
| Services | 20,271 | 43% | 8,548 | 28% |
| | $47,407 | | $30,222 | |
We experienced an increase in our product revenue stream of $5.5 million in the year ended December 31, 2013, as compared to the prior year, as a result of customer purchases for the Winter Olympics in Sochi, Russia, a substantial implementation at a new customer facility in North America, a major graphics overhaul at a customer headquarters in Latin America, and incremental product sales of $2.4 million in the year resulting from our Business Combination with Hego.
Our services revenue increased by $11.7 million in 2013, primarily from the incremental contribution of $13.0 million of Hego services since the date of the Business Combination.
Gross profit. Gross margins for the years ended December 31, 2013 and 2012 were 66% and 69%, respectively. The decrease in the gross margin percentage is primarily attributable to product mix. As services become a greater component of revenues, as a result of our Hego operations, we expect our margins to decline because our products carry a higher gross margin than our services. Absent the effect of product mix, we have been able to obtain reasonable and consistent pricing for our materials.
Selling, general and administrative expenses. Selling, general and administrative expenses are as follows (in thousands):
| | Year Ended December 31, |
| | 2013 | 2012 |
| Sales and marketing | $13,260 | $13,008 |
| General and administrative | 11,576 | 4,201 |
| | $24,836 | $17,209 |
The increase in sales and marketing expenses (S&M") in the year ended December 31, 2013, as compared to 2012, is primarily attributable to the incremental costs of $2.6 million from our Business Combination with Hego, offset by reductions of $2.3 million in personnel and the related direct costs. During the second half of 2012, we reduced costs in this area by redeploying our resources to growth markets and eliminating positions in non growth areas that resulted in savings realized in fiscal 2013.
The increase in general and administrative ("G&A") expenses in the year ended December 31, 2013 is primarily a result of approximately $1.5 million in compensation related severance costs payable to executive officers as a result of change in control agreements, $1.0 million in salary and incentive compensation arrangements, Hego transaction-related costs of $1.0 million and $1.7 million in incremental costs from our Business Combination with Hego. Also, as a result of the Business Combination, all of our outstanding equity awards, at the time of the combination, became immediately exercisable and fully vested which resulted in a charge of $1.3 million, representing the unamortized expense of such awards. In addition, as a result of our downsizing on May 2, 2013, affected employees were provided with a modification in the terms of their stock options and awards that were outstanding on their termination date. As a result, we recorded a $0.4 million charge related to the modification of these awards.
Research and development expenses. Research and development ("R&D") expenses were $9.2 million in the year ended December 31, 2013 compared to $7.4 million in the year ended
December 31, 2012. The increase in 2013 is due primarily to the incremental costs of $2.6 million incurred as a result of our Hego operations, offset by other expense decreases in personnel, consulting and materials as certain projects are completed.
Change in fair value of contingent consideration. In connection with the Business Combination with Hego, a portion of the purchase price consisted of contingent consideration of shares of our common stock. The fair value of any contingent consideration was established at the date of the Business Combination and included in the total purchase price. The contingent consideration is then adjusted to the then current fair value as an increase or decrease to earnings in each reporting period. In the year ended December 31, 2013 a charge of $4.8 million has been recorded in order to adjust the contingent consideration to $12.3 million, its current fair value at December 31, 2013.
Interest expense, net. Interest expense, net increased in the year ended December 31, 2013 as compared to the year ended December 31, 2012. This is due to the advances that we took on the U.S. term loan in the fourth quarter of 2012 and the addition of interest expense associated with the additional long-term debt that we assumed from Hego in the Business Combination.
Other (loss) income, net. The components of other (loss) income, net are as follows (in thousands):
| | Year Ended |
| | December 31, |
| | 2013 | 2012 |
| Foreign exchange transaction gain (loss) | $(36) | $ 13 |
| Other | 11 | 2 |
| | $(25) | $ 15 |
We continue to be exposed to foreign currency and exchange risk in the normal course of business due to international transactions. However, we believe that it is not material to our near-term financial position or results of operations. We expect that this exposure will increase in the future due to our Business Combination with Hego, as a result of which a larger percentage of the Company's business is expected to be transacted in foreign currencies.
Income tax benefit (expense), net. In the year ended December 31, 2013 we recorded an income tax benefit of $0.1 million and in the year ended December 31, 2012 we recorded an income tax expense of $18.5 million. Included in 2012 was an increase to our valuation allowance for deferred taxes of $19.5 million, offset by approximately $1.0 million in deferred tax benefits. Accounting standards require that we continually assess the likelihood that our deferred taxes will be realizable. In making such assessments, all available evidence, both positive and negative, must be considered in determining whether it is more likely than not that the deferred tax assets will be realized. Significant weight is given to evidence that can be objectively verified. In 2012, we considered the fact that we incurred another loss, in addition to the consecutive losses in recent preceding fiscal years. Also in 2012, approximately $5.6 million of federal net operating losses expired unutilized. These negative factors, combined with uncertain near-term market and economic conditions, reduced our ability to rely on our projections of future taxable income in determining whether a valuation allowance was required.
Accordingly, we concluded that a full valuation allowance was required and a charge to results of operations of $19.5 million was recorded. We will continue to assess the likelihood that our deferred tax assets will be realizable, and our valuation will be adjusted accordingly. The difference between our effective income tax rate and the federal statutory rate is primarily due to transaction costs associated with our Business Combination with Hego and the mark to market adjustment for our contingent liability that will not be deductible for tax purposes and the amount of expense associated with our share-based payment arrangements and the portion thereof that will give rise to tax deductions. Furthermore, share-based payments may result in tax deductions that do not result in a tax benefit in the accompanying consolidated financial statements because it will not result in the reduction of income taxes payable, due to the existence of net operating loss carryforwards.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
We have elected not to report our results of operations for the fiscal year ended December 31, 2011, or to include a discussion of our results of operations for such period compared to 2012, in reliance upon Instruction 1 to Item 303(a) of Regulation S-K. Investors are urged to read our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 for this information.
Liquidity and Capital Resources
Sources and Uses of Funds
At December 31, 2013, we had cash and cash equivalents on hand of $5.3 million and working capital of $1.2 million. Approximately $5.5 million in cash was generated from operations in 2013 primarily as a result of our loss of $7.8 million, offset by the non-cash charges that were included in our statement of operations and the increase in accounts payable and other accrued expenses for items that were not due until 2014. Approximately $2.0 million was used to fund acquisitions of property and equipment in order to service several European soccer leagues with real-time digital sports data systems and approximately $0.9 million, net, was used for payments on debt and capital leases.
Also during 2013 we made required contributions of $0.3 million to our pension plan and we expect to make contributions of $0.5 million over the next twelve months as required under ERISA. Our pension plan assets were valued at $5.7 million and $5.9 million at December 31, 2013 and December 31, 2012, respectively. Our investment strategy has been consistent in recent years and we believe that the pension plan's assets are more than adequate to meet pension plan obligations for the next twelve months.
On August 5, 2013, we entered into a loan modification and waiver agreement relating to our then existing credit facility with Silicon Valley Bank ("SVB"), whereby the expiration date of such credit facility was extended with the intention that we would enter into a new credit facility with SVB. We failed to meet certain financial covenants under the then existing credit facility from May 31, 2013 to September 30, 2013 due to the Business Combination, which was
not anticipated when the original covenant requirements were established. We obtained waivers from SVB with respect to those financial covenants.
In November 2013, we entered into a new two-year $4.0 million revolving line of credit (the "Revolver") with SVB. Borrowings on the Revolver will be based on 80% of eligible accounts receivable. At December 31, 2013, available borrowings under the Revolver were $3.3 million but no borrowings were outstanding. We are also required to maintain an adjusted quick ratio ("AQR") of at least 1.25 to 1.0, measured at each calendar month-end. Additionally, if our AQR falls below 1.5x at any month-end, then any borrowings will be repaid by SVB applying collections from our SVB collateral account (for receipts by wire) and SVB lockbox account (for receipts by check) to reduce the revolving loan balance on a daily basis, until such time as the month-end AQR is again 1.5x or greater. If the AQR at month-end is 1.5x or greater, we will maintain a static loan balance and all collections will be deposited into our operating account. At December 31, 2013, we are in compliance with our bank covenants.
The Revolver will bear interest at a floating annual rate equal to SVB's prime rate ("Prime") +1.25%. If our AQR falls below 1.5x at any month-end, the interest rate will be Prime +1.75%. In connection with the Revolver, we were required to pay the outstanding balance on our then outstanding term loan which was $0.4 million on the closing date. The original term loan was being repaid over 30 months and was subject to interest at Prime + 2.25% (which was 4.5% at December 31, 2013).
As is usual and customary in such lending agreements, the Revolver also contains certain non-financial requirements, such as required periodic reporting to the bank and various representations and warranties. The Revolver also restricts our ability to pay dividends without the bank's consent.
The Revolver is collateralized by our assets of the U.S. subsidiaries, except for (i) our intellectual property rights which are subject to a negative pledge arrangement with the bank, and (ii) any equipment whose purchase is financed by any other lender or lessor, solely to the extent the security agreement with such lender or lessor prohibits junior liens on such equipment, and only until the lien held by such lender or lessor is terminated or released with respect to such equipment.
We also have revolving credit facilities associated with our European operations that total $1.3 million of which $0.9 million is outstanding at December 31, 2013. The revolving credit facilities have expiration dates of December 31, 2014 and automatically renew for twelve month periods unless notified by the lender ninety days prior to expiration. In addition, we have four outstanding term loans in Europe that total $0.4 million at December 31, 2013. Three of the term loans require principal payments that total $10 thousand per month and the third term loan, which has an outstanding balance of $0.2 million at December 31, 2013, required no principal payments and was paid in full in January 2014.
In September 2013, Sportsground AB, our 51% owned subsidiary purchased 100% of the equity of Granvideo AB ("Granvideo") for a total purchase price of $1.04 million. (See Note 8 to the Consolidated Financial Statements.) In connection with the acquisition, we issued a note
payable to the previous shareholder of Granvideo in the principal amount of $1.2 million with a maturity date of December 31, 2017. The note does not bear interest and accordingly was recorded at an original discounted amount of $1.04 million. We made principal payments of $0.06 million on September 1, 2013 and $0.1 million on November 15, 2013 and are required to make four equal annual principal payments of $0.26 million on December 31 from 2014 to 2017. The principal balance at December 31, 2013 was $0.9 million.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
Our contractual obligations as of December 31, 2013 were as follows (in thousands):
| | Payments Due by Period |
| | | Less Than | One to | Three to | More Than |
| Contractual Obligations | Total | One Year | Three Years | Five Years | Five Years |
| | | | | | |
| Operating lease obligations | $ 8,044 | $ 1,872 | $ 3,280 | $ 2,270 | $ 622 |
Pension obligations (1) | 2,715 | 518 | 2,197 | | |
| Commitment for hosting services | 1,857 | 857 | 1,000 | | |
| Note payable | 921 | 230 | 461 | 230 | |
| Term Loan | 355 | 340 | 15 | | |
| Capital lease obligations | 415 | 215 | 200 | | |
| Total | $14,307 | $ 4,032 | $ 7,153 | $ 2,500 | $ 622 |
(1) Lower than expected investment performance could accelerate or increase the amount of payment of required contributions in future years.
Liquidity
Our long-term success will depend on our ability to achieve and sustain profitable operating results and our ability to raise additional capital on acceptable terms should such additional capital be required. In the event that we are unable to achieve expected goals of profitability or raise sufficient additional capital, if needed, we may have to scale back or eliminate certain parts of our operations.
Based on our plan for continuing to combine the operating activities of both Chyron and Hego, and provided that we are able to achieve our planned results of operations and retain the availability under our credit facilities, we believe that cash on hand, net cash to be generated in the business, and availability of funding under our credit facilities, will be sufficient to meet our cash requirements for at least the next twelve months.
If these sources of funds are not sufficient, we may need to reduce, delay or terminate our existing or planned products and services. We may also need to raise additional funds through one or more capital financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the
rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or products, or grant licenses on terms that are not favorable to us.
There can be no assurance that additional funds will be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate development activities for one or more of our products or services; or delay, limit, reduce or terminate our sales and marketing capabilities or other activities that may be necessary to commercialize one or more of our products or services.
Common Stock in our 401(k) Plan
We have a 401(k) plan for U.S. employees into which we make discretionary matching contributions. The discretionary matching contribution is currently two thirds of the first 6% of qualifying compensation up to the IRS limits for tax-deferred employee contributions. We have the option of making the matching contribution in cash or through the issuance of Company stock. During 2013 and 2012, we issued 204 thousand and 233 thousand shares, respectively, of common stock in connection with the Company match for our 401(k) plan in lieu of an aggregate cash match of $243 thousand and $288 thousand, respectively. A participant in the 401(k) plan has 15 investment choices.
Impact of Inflation and Changing Prices
Although we cannot accurately determine the precise effect of inflation, we believe that it has not significantly impacted our revenues or increased the costs of salaries, benefits and general and administrative expenses. We attempt to pass on increased costs and expenses by developing more useful and cost-effective products for our customers that can be sold at more favorable profit margins.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1 of our consolidated financial statements included in this Annual Report under the caption "Item 8 - Financial Statements and Supplementary Data."
Critical Accounting Policies and Estimates
Management believes the following critical accounting policies, among others, comprise the more significant judgments and estimates used in the preparation of our consolidated financial statements. These critical accounting policies and estimates have been discussed with our Audit Committee and the Audit Committee has reviewed the disclosures relating to such matters.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, title has transferred, product payment is not contingent upon installation or other service obligations, the price is fixed and determinable, and collectability is reasonably assured. This condition is normally met when the product has been delivered or upon performance of services. In instances where final acceptance of the product or service is specified by the customer, revenue is deferred until all acceptance criteria have been met.
We also enter into arrangements that contain multiple elements such as equipment, installation and service. For multiple-element arrangements, revenue is recognized based on an allocation of the total amount of the arrangement to each deliverable based on fair value. Fair value is determined using vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or best estimate of selling price ("BESP") if neither VSOE or TPE is available. BESP must be determined in a manner that is consistent with that used to determine the price to sell the specific elements on a standalone basis. Our best estimate of selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies and through different sales channels, gross margin objectives, competitor pricing pressures and other factors contemplated in negotiating the arrangement with the customer.
Revenue from training, commissioning and services is recognized upon the performance of services. We also provide one year maintenance contracts with certain equipment sales and defer a portion of the revenue from the equipment sale based on the relative fair value as determined above. Multiple year maintenance contracts are also offered. Deferred maintenance revenue is recognized ratably, on a straight line basis over the contract period, generally one to three years.
In connection with our on-line web-based solutions, we recognize revenue on a monthly basis for use of our subscription based products. We recognize set-up or other up-front fees, if any, ratably over the longer of the contract or the expected customer relationship period, generally one to three years.
Approximately 21% of 2013 consolidated revenues were made to third-party dealers, independent representatives and system integrators (collectively, dealers). We recognize revenue from sales to dealers when the product is shipped and all other revenue recognition criteria are met.
Allowances for Doubtful Accounts, Inventory and Warranties
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances and/or the deferral of revenue may be required.
We write-down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Technology changes and market conditions may render some of our products obsolete and additional inventory write-downs may be required. If actual, future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability may be required.
Self Insurance
We are self-insured for healthcare costs up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred, but not reported ("IBNR") claims. IBNR claims are estimated using historical lag information and other data provided by claims administrators. This estimation process is subjective, and to the extent that future actual results differ from original estimates, adjustments to recorded accruals may be necessary.
Income Taxes
We account for income taxes under an asset and liability approach, which recognizes deferred tax assets and liabilities based on the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the net deferred tax assets will not be realized.
We recognize tax benefits associated with the exercise of stock options directly to stockholders' equity only when realized. A tax benefit occurs when the actual tax benefit realized by us upon an employee's disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that we had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, we follow the tax law ordering method, under which current year share-based compensation deductions are assumed to be utilized before net operating loss carryforwards and other tax attributes.
Deferred taxes have not been provided for undistributed earnings of foreign subsidiaries since substantially all of these earnings are expected to be permanently reinvested in our foreign operations. A deferred tax liability is recognized when we expect that we will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. The Company intends to permanently reinvest any undistributed earnings and has no plan for further repatriation. Determination of the amount of the unrecognized U.S. income
tax liability on undistributed earnings is not practical because of the complexities of the hypothetical calculation. In addition, unrecognized foreign tax credit carryforwards would be available to reduce a portion of such U.S. tax liability.
We recognize the financial statement impact of tax provisions, taken or expected to be taken, utilizing a more-likely-than-not recognition threshold. We also recognize any interest and penalties related to tax uncertainties as income tax expense. At December 31, 2013, there are no unrecognized tax benefits, or related accrued interest and penalties, recorded in the consolidated financial statements.
Goodwill
We evaluate goodwill for impairment on an annual basis during our fourth quarter, or more frequently if circumstances indicate impairment might exist. Goodwill is evaluated for impairment through the comparison of fair value of our reporting units to their carrying values. When evaluating goodwill for impairment, we may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit is more-likely-than-not greater than its carrying amount. This qualitative assessment is referred to as a "step zero" approach. If, based on the review of the qualitative factors, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we bypass the required two-step impairment test. If we do not perform a qualitative assessment or if the fair value of the reporting unit is not more-likely-than-not greater than its carrying value, we perform the first step, which is referred to as step one, of the two-step impairment test, and calculate the estimated fair value of the reporting unit. If the carrying value of goodwill exceeds the estimated fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is determined by comparing the implied fair value of the reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment loss for the difference. In considering the step zero approach to testing goodwill for impairment, we perform a qualitative analysis evaluating factors including, but not limited to, macro-economic conditions, market and industry conditions, internal cost factors, competitive environment, share price fluctuations, results of past impairment tests, and the operational stability and the overall financial performance of the reporting units. During the fourth quarter of fiscal 2013, we utilized a qualitative assessment for our reporting units where no significant change occurred and no potential impairment indicators existed since the previous evaluation of goodwill, and concluded it is more-likely-than-not that the fair value was more than its carrying value on a reporting unit basis.
At December 31, 2013 and 2012, our goodwill balance was $18.9 million and $2.1 million, respectively. As we did not become aware of any impairment indicators subsequent to the date of the annual assessment, we determined there was no impairment as of December 31, 2013.
Retirement-Related Benefits
Pension expense for the defined benefit pension plan and the determination of future pension obligations are determined based upon a number of actuarial assumptions. The assumptions are based on historical rates of inflation and investment performance, target asset allocations and projected rates of compensation increase. Year-end discount rates were developed from a major bank pension index that matches expected benefit payments under the defined benefit pension plan. We determine our expected rate of return on plan assets from the plan assets' historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class. These assumptions are reviewed annually by us with input from our actuaries and investment advisors. In the event that actual results differ from the actuarial assumptions, or the fair value of the underlying assets change, the funded status of the defined benefit plan may change and any such change could result in a charge or credit to equity and an increase or decrease in future pension expense and cash contributions.
Share-Based Compensation
Our share-based compensation programs consist of grants of share-based awards to employees and non-employee directors, including stock options, restricted stock, restricted stock units and other equity awards. The estimated fair value of these awards, including the effect of forfeitures, is charged to income over the requisite service period, which is generally the vesting period.
The fair value of stock options is estimated at the grant date using the Black-Scholes option valuation model which requires us to make assumptions about the expected life of options, stock price volatility, risk-free interest rates and dividend yields. The fair value of restricted stock units is based on the closing market value of our common stock on the date of grant. Although we believe our judgments, estimates and/or assumptions related to share-based compensation are reasonable, making material changes to such judgments, estimates and/or assumptions could affect our financial results.
Fair Value Measurements
Financial assets and liabilities are classified as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this Item is omitted this year in reliance upon Item 305(e) of Regulation S-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
| Financial Statements: | Page |
| | |
| Report of BDO USA, LLP, Independent Registered Public | |
Accounting Firm | 43 |
| | |
Consolidated Balance Sheets at December 31, 2013 and 2012 | 44 |
| | |
| Consolidated Statements of Operations for the Years Ended | |
December 31, 2013 and 2012 | 45 |
| | |
| Consolidated Statements of Comprehensive Loss for the Years Ended | |
December 31, 2013 and 2012 | 46 |
| | |
| Consolidated Statements of Cash Flows for the Years Ended | |
December 31, 2013 and 2012 | 47 |
| | |
| Consolidated Statements of Shareholders' Equity for the Years Ended | |
December 31, 2013 and 2012 | 48 |
| | |
Notes to the Consolidated Financial Statements | 49 |
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
ChyronHego Corporation
Melville, New York
We have audited the accompanying consolidated balance sheets of ChyronHego Corporation as of December 31, 2013 and 2012 and the related consolidated statements of operations, comprehensive loss, shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ChyronHego Corporation at December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Melville, New York
March 14, 2014
CHYRONHEGO CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
| | December 31, |
| Assets | 2013 | 2012 |
| Current assets: | | |
Cash and cash equivalents | $ 5,266 | $ 2,483 |
Accounts receivable, net | 7,781 | 5,630 |
Inventories, net | 2,816 | 2,285 |
| Prepaid expenses and other current assets | 2,525 | 626 |
Total current assets | 18,388 | 11,024 |
| | | |
Property and equipment, net | 4,145 | 1,347 |
Intangible assets, net | 8,968 | 559 |
Goodwill | 18,948 | 2,066 |
Deferred tax asset | 56 | - |
| Other assets | 147 | 119 |
TOTAL ASSETS | $50,652 | $15,115 |
| |
| Liabilities and Shareholders' Equity | |
| Current liabilities: | | |
Accounts payable and accrued expenses | $ 9,240 | $ 3,100 |
Deferred revenue | 4,660 | 3,637 |
Due to related parties | 716 | - |
Current portion of pension liability | 518 | 278 |
Deferred tax liability | 271 | - |
Short-term debt | 1,532 | 280 |
Capital lease obligations | 215 | 20 |
Total current liabilities | 17,152 | 7,315 |
| | | |
Contingent consideration | 12,260 | - |
Pension liability | 2,197 | 3,873 |
Deferred revenue | 923 | 1,198 |
Long-term debt | 772 | 397 |
Deferred tax liability | 1,195 | - |
Other liabilities | 686 | 351 |
Total liabilities | 35,185 | 13,134 |
| | | |
| Commitments and contingencies | | |
| | | |
| Shareholders' equity: | | |
| Preferred stock, par value without designation | | |
| Authorized - 1,000,000 shares, Issued - none | | |
| Common stock, par value $.01 | | |
| Authorized - 150,000,000 shares | | |
| Issued and outstanding – 30,788,251 and 17,135,239 | | |
at December 31, 2013 and 2012, respectively | 308 | 171 |
Additional paid-in capital | 103,642 | 84,539 |
Accumulated deficit | (88,243) | (80,404) |
Accumulated other comprehensive loss | (421) | (2,325) |
Total ChyronHego Corporation shareholders' equity | 15,286 | 1,981 |
Non-controlling interests | 181 | - |
Total shareholders' equity | 15,467 | 1,981 |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $50,652 | $15,115 |
See Notes to Consolidated Financial Statements
CHYRONHEGO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | Years Ended December 31, |
| | 2013 | 2012 |
| | | |
| Product revenues | $27,136 | $21,674 |
| Service revenues | 20,271 | 8,548 |
| Total revenues | 47,407 | 30,222 |
| | | |
| Cost of sales | 16,296 | 9,319 |
| Gross profit | 31,111 | 20,903 |
| | | |
| Operating expenses: | | |
| Selling, general and administrative | 24,836 | 17,209 |
| Research and development | 9,163 | 7,443 |
| Change in fair value of contingent consideration | 4,760 | - |
| Total operating expenses | 38,759 | 24,652 |
| | | |
| Operating loss | (7,648) | (3,749) |
| | | |
| Interest expense, net | (261) | (28) |
| | | |
| Other (loss) income, net | (25) | 15 |
| | | |
| Loss before taxes | (7,934) | (3,762) |
| | | |
| Income tax benefit (expense), net | 134 | (18,539) |
| | | |
| Net loss | (7,800) | (22,301) |
| | | |
| Less: Net income attributable to non-controlling interests | 39 | - |
| | | |
| Net loss attributable to ChyronHego shareholders | $(7,839) | $(22,301) |
| | | |
| Net loss per share attributable to ChyronHego | | |
| shareholders - basic | $ (0.31) | $ (1.31) |
| | | |
| Net loss per share attributable to ChyronHego | | |
| shareholders - diluted | $ (0.31) | $ (1.31) |
| | | |
| Weighted average shares outstanding: | | |
| Basic | 25,379 | 16,961 |
| Diluted | 25,379 | 16,961 |
See Notes to Consolidated Financial Statements
CHYRONHEGO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| | Years Ended December 31, |
| | 2013 | 2012 |
| | | |
Net loss | $ (7,800) | $(22,301) |
| | | |
| Other comprehensive income (loss): | | |
| | | |
Deferred pension income (loss) | 1,760 | (910) |
| | | |
Cumulative translation adjustment | 144 | 13 |
| | | |
Comprehensive loss | (5,896) | (23,198) |
| | | |
| Less: Comprehensive income attributable to | | |
non-controlling interest | 39 | - |
| | | |
| Comprehensive loss attributable to ChyronHego | | |
Corporation | $ (5,935) | $(23,198) |
See Notes to Consolidated Financial Statements
CHYRONHEGO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | Years Ended December 31, |
| | 2013 | 2012 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | |
| Net loss | $(7,800) | $(22,301) |
| Adjustments to reconcile net loss to net cash from | | |
| operating activities: | | |
| Depreciation and amortization | 2,913 | 919 |
| Deferred tax asset allowance | 23 | 19,475 |
| Deferred income tax benefit | (70) | (974) |
| Share-based payment arrangements | 2,993 | 938 |
| Shares issued for 401(k) match | 243 | 288 |
| Inventory provisions | 225 | 85 |
| Change in fair value of contingent consideration | 4,760 | - |
| Other | 147 | (63) |
| Changes in operating assets and liabilities, net of acquisitions: | | |
| Accounts receivable | 632 | 97 |
| Inventories | (756) | (238) |
| Prepaid expenses and other assets | (444) | 127 |
Accounts payable and accrued expenses | 1,673 | (747) |
Deferred revenue | 409 | 867 |
Other liabilities | 536 | (164) |
| Net cash provided by (used in) operating activities | 5,484 | (1,691) |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | |
Acquisitions of property and equipment | (1,989) | (546) |
Purchase of businesses, net of cash acquired | 14 | - |
Net cash used in investing activities | (1,975) | (546) |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| Proceeds from borrowings | 311 | 700 |
| Repayments on debt | (1,048) | (159) |
| Proceeds from revolving credit facilities, net | 73 | - |
| Payments on capital lease obligations | (196) | (38) |
| Proceeds from exercise of stock options | 12 | 1 |
| Net cash (used in) provided by financing activities | (848) | 504 |
| | | |
| Effect of exchange rates on cash and cash equivalents | 122 | - |
| | | |
| Change in cash and cash equivalents | 2,783 | (1,733) |
| Cash and cash equivalents at beginning of year | 2,483 | 4,216 |
| Cash and cash equivalents at end of year | $ 5,266 | $ 2,483 |
| | | |
| SUPPLEMENTAL CASH FLOW INFORMATION: | | |
Interest paid | $ 315 | $ 15 |
Taxes paid | 405 | 29 |
Deferred pension income (loss) | 1,760 | (910) |
| | | |
| Common stock and warrants issued for acquisitions | $17,370 | - |
Contingent consideration for acquisition | 7,500 | - |
Debt incurred for acquisition | 1,044 | - |
See Notes to Consolidated Financial Statements
CHYRONHEGO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
| | | | | | Accumulated | | |
| | | | Additional | | Other | Non- | |
| | Common Stock | Paid-In | Accumulated | Comprehensive | Controlling | |
| | Shares | Amount | Capital | (Deficit) | Income (loss) | Interests | Total |
| | | | | | | | |
| Balance at January 1, 2012 | 16,639 | $ 166 | $ 83,407 | $(58,103) | $ (1,428) | | $ 24,042 |
| | | | | | | | |
Net loss | | | | (22,301) | | | (22,301) |
| | | | | | | | |
| Other comprehensive loss | | | | | (897) | | (897) |
| | | | | | | | |
| Share-based compensation | | | 938 | | | | 938 |
| | | | | | | | |
| Shares issued upon exercise of | | | | | | | |
stock options | 2 | | 1 | | | | 1 |
| | | | | | | | |
| Shares issued for vesting of | | | | | | | |
| restricted stock units and | | | | | | | |
restricted stock | 261 | 3 | (93) | | | | (90) |
| | | | | | | | |
| Shares issued for 401(k) match | 233 | 2 | 286 | | | | 288 |
| | | | | | | | |
| Balance at December 31, 2012 | 17,135 | 171 | 84,539 | (80,404) | (2,325) | | 1,981 |
| | | | | | | | |
Net loss | | | | (7,839) | | $ 39 | (7,800) |
| | | | | | | | |
| Other comprehensive income | | | | | 1,904 | | 1,904 |
| | | | | | | | |
| Share-based compensation | | | 2,157 | | | | 2,157 |
| | | | | | | | |
| Shares issued upon exercise of | | | | | | | |
stock options | 37 | | 12 | | | | 12 |
| | | | | | | | |
| Shares issued for vesting of | | | | | | | |
| restricted stock units and | | | | | | | |
| executive compensation | 799 | 8 | 211 | | | | 219 |
| | | | | | | | |
| Shares issued for 401(k) match | 204 | 2 | 241 | | | | 243 |
| | | | | | | | |
| Shares and warrants | | | | | | | |
| issued for acquisitions | 12,613 | 127 | 16,482 | | | 142 | 16,751 |
| | | | | | | | |
| Balance at December 31, 2013 | 30,788 | $ 308 | $103,642 | $(88,243) | $ (421) | $ 181 | $15,467 |
See Notes to Consolidated Financial Statements
CHYRONHEGO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
On May 22, 2013 Chyron Corporation ("Chyron") acquired the outstanding stock of Hego Aktiebolag ("Hego" or "Hego AB"), and changed its name to ChyronHego Corporation (the "Company" or "ChyronHego"). Hego is a global graphics services company based in Stockholm, Sweden that develops real-time graphics products for the broadcast and sports industries. The companies combined in a stock-for-stock transaction and the Company has continued to trade on the NASDAQ under the symbol "CHYR." The combination of these two companies, which is referred to in these consolidated financial statements as the "Business Combination," forms a leading global provider of broadcast graphics creation, playout and real-time data visualization.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany amounts have been eliminated. The results of operations include the operating results of Hego since the completion of the Business Combination on May 22, 2013. See Note 8 of these consolidated financial statements.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, costs and expenses during the periods presented. Estimates made by management include inventory valuations, stock compensation, allowances for doubtful accounts, income taxes, pension assumptions, allocations of purchase price, contingent consideration, valuation of intangible assets and reserves for warranty and incurred but not reported health insurance claims. Actual results could differ from those estimates. The Company has not segregated its cost of sales between costs of products and costs of services as it is not practicable to segregate such costs. Certain prior amounts have been reclassified to conform to the current year presentation.
Cash and Cash Equivalents
Cash includes cash on deposit, overnight repurchase agreements, and amounts invested in highly liquid money market funds. Cash equivalents consist of short term investments with original maturities of three months or less. Cash and cash equivalents include $3.9 million and $1.7 million of investments in overnight repurchase agreements at December 31, 2013 and 2012, respectively. Repurchase agreements are collateralized by U.S. Treasury and federal agency securities with a fair value of 102% of the securities sold. This credit risk is primarily divided
among six financial institutions that management believes to be of high quality. The carrying amount of cash and cash equivalents approximates their fair value.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable are stated net of an allowance for doubtful accounts. Our allowance for doubtful accounts considers historical experience, the age of amounts due, current economic conditions and other factors that may affect customers' ability to pay.
Inventories
Inventories are stated at the lower of cost or market, cost being determined primarily on the basis of FIFO and average cost. The need for inventory obsolescence provisions is evaluated by the Company and when appropriate, reserves for technological obsolescence, non-profitability of product lines and excess quantities are established.
Property, Equipment and Depreciation
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight line method over the following estimated useful lives:
| Machinery and equipment | 3-10 years |
| Furniture and fixtures | 5-10 years |
| Automobiles | 3-4 years |
| Leasehold improvements | Shorter of the life of improvement or remaining life of the lease |
When assets are retired or disposed of, the assets and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations.
Capitalized Software Costs
For development costs related to the Company's on line web-based solutions, the Company capitalizes costs incurred during the application development stage. Costs related to preliminary project activities and post implementation activities were expensed as incurred. The Company has not capitalized any software development costs for the years ended December 31, 2013 and 2012.
Self Insurance
The Company is self-insured for healthcare costs up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred, but not reported ("IBNR") claims. IBNR claims are estimated using historical lag information and other data provided by
claims administrators. This estimation process is subjective, and to the extent that future actual results differ from original estimates, adjustments to recorded accruals may be necessary.
Research, Development and Engineering
Technological feasibility for the Company's products is reached shortly before the products are released to manufacturing. Consequently, costs incurred after technological feasibility is established have not been material, and accordingly, the Company expenses all research and development costs when incurred. The Company re-evaluates the materiality of these costs on an on-going basis. Research and development costs include wages and other personnel costs, material costs and an allocation of certain indirect costs related to facilities.
Long-Lived Assets and Intangible Assets
Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. There was no impairment of long-lived assets and intangible assets for the years ended December 31, 2013 and 2012.
Goodwill and Indefinite-Lived Intangible Assets
The Company’s goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in various business combinations. The Company also has an indefinite-lived intangible consisting of a tradename. Goodwill and intangible assets deemed to have indefinite lives are not amortized and are tested for impairment at least annually. When evaluating goodwill for impairment, we may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit is more-likely-than-not greater than its carrying amount. If, based on the review of the qualitative factors, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we bypass the required two-step impairment test. If we do not perform a qualitative assessment or if the fair value of the reporting unit is not more-likely- than-not greater than its carrying value, we perform the first step, which is referred to as step one, of the two-step impairment test, and calculate the estimated fair value of the reporting unit. If the carrying value of goodwill exceeds the estimated fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment for goodwill and other intangible assets is measured as the excess of its carrying amount over its fair value.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, title has transferred, product payment is not contingent upon installation or other service obligations, the price is fixed and determinable, and collectability is reasonably assured. This condition is normally met when the product has been delivered or upon performance of services. In instances where final acceptance of the product or service is specified by the customer, revenue is deferred until all acceptance criteria have been met.
The Company also enters into arrangements that contain multiple elements such as equipment, installation and service. For multiple-element arrangements, revenue is recognized based on an allocation of the total amount of the arrangement to each deliverable based on fair value. Fair value is determined using vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or best estimate of selling price ("BESP") if neither VSOE or TPE is available. BESP must be determined in a manner that is consistent with that used to determine the price to sell the specific elements on a standalone basis. The Company's best estimate of selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies and through different sales channels, gross margin objectives, competitor pricing pressures and other factors contemplated in negotiating the arrangement with the customer.
Revenue from training, installation and services is recognized upon the performance of services. The Company also provides one year maintenance contracts with certain equipment sales and defers a portion of the revenue from the equipment sale based on the relative fair value as determined above. Multiple year maintenance contracts are also offered. Deferred maintenance revenue is recognized ratably, on a straight line basis over the contract period, generally one to three years.
In connection with the Company's on-line web-based solutions, the Company recognizes revenue on a monthly basis for use of its subscription based products. The Company recognizes set-up or other up-front fees, if any, ratably over the longer of the contract or the expected customer relationship period, generally one to three years. Revenues from these web-based solutions are included in service revenues in the Company's Consolidated Statements of Operations.
Approximately 21% and 35% of 2013 and 2012 consolidated revenues, respectively, were made through third-party dealers and system integrators (collectively, dealers). The Company recognizes revenue from sales to dealers when the product is shipped and all other revenue recognition criteria are met.
Shipping and Handling Fees and Costs
All amounts billed to a customer in a sales transaction related to shipping and handling represent revenues earned and are reported as revenue, and the costs incurred by the Company for shipping and handling are reported as a component of cost of sales. Amounts billed have approximated $0.1 million in 2013 and 2012.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $50 thousand in 2013 and $74 thousand in 2012.
Income Taxes
The Company accounts for income taxes under an asset and liability approach, which recognizes deferred tax assets and liabilities based on the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the net deferred tax assets will not be realized.
The Company recognizes tax benefits associated with the exercise of stock options directly to stockholders' equity only when realized. A tax benefit occurs when the actual tax benefit realized by the Company upon an employee's disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that the Company had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, the Company follows the tax law ordering method, under which current year share-based compensation deductions are assumed to be utilized before net operating loss carryforwards and other tax attributes.
The Company recognizes the financial statement impact of tax positions, taken or expected to be taken, utilizing a more-likely-than not recognition threshold. We also recognize any interest and penalties related to tax uncertainties as income tax expense. At December 31, 2013 there are no unrecognized tax benefits, or related accrued interest and penalties, recorded in the consolidated financial statements.
Sales and Value Added Taxes
The Company accounts for sales and value added taxes imposed on the Company's goods and services on a net basis in the Company's Consolidated Statements of Operations. Since the Company primarily acts as an agent for the governmental authorities in these matters, the amount charged to the customer is collected and remitted directly to the appropriate jurisdictional entity.
Foreign Currencies
Assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at the period end rate of exchange, while revenues and expenses are translated at the average exchange rate during the period. Adjustments from translating the Company's foreign subsidiaries' financial statements are reported as a component of other comprehensive income or loss. Transaction gains or losses are included in other income and expense, net. The net impact of foreign exchange transactions for the years ended December 31, 2013 and 2012 were a loss of $36 thousand and a gain of $13 thousand, respectively.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and restricted stock units are reflected in diluted net income (loss) per share by applying the treasury stock method.
The Company recorded net losses for the years ended December 31, 2013 and 2012. Potential common shares are anti-dilutive in periods in which the Company records a net loss because they would reduce the respective period's net loss per share. Anti-dilutive potential common shares are excluded from the calculation of diluted earnings per share. As a result, net diluted loss per share was equal to basic net loss per share in all periods presented.
| | Years Ended December 31, |
| | 2013 | 2012 |
| Basic weighted average shares outstanding | 25,379 | 16,961 |
| Effect of dilutive stock options | - | - |
| Diluted weighted average shares outstanding | 25,379 | 16,961 |
| | | |
| Weighted average shares which are not included | | |
| in the calculation of diluted earnings per share | | |
| because their impact is antidilutive | | |
| Stock options | 2,803 | 3,087 |
| Restricted stock units | 30 | 173 |
Other Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with ASC 220-10. ASC 220-10 establishes guidelines for the reporting and display of comprehensive income (loss), net income (loss) and its components in financial statements. Included in other comprehensive income (loss) for the Company are the deferred income (losses) on the Company's pension plan and translation adjustments related to the Company's foreign subsidiaries.
Share-Based Compensation
The Company's share-based compensation programs consist of grants of share-based awards to employees and non-employee directors, including stock options, restricted stock, restricted stock units and other equity awards. The estimated fair value of these awards, including the effect of forfeitures, is charged to income over the requisite service period, which is generally the vesting period.
The fair value of stock options is estimated at the grant date using the Black-Scholes option valuation model. The fair value of restricted stock units is based on the market value of the Company's common stock on the date of grant.
Fair Value Measurements
Financial assets and liabilities are classified as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability.
Retirement-Related Benefits
The Company recognizes in its balance sheet as an asset or liability the overfunded or underfunded status of its defined benefit plan. This asset or liability is measured as the difference between the fair value of plan assets and the benefit obligation, which is calculated based on actuarial computations of current and future benefits for employees. Actuarial gains or losses and prior service costs or credits that arise during the period, but are not included as components of net periodic benefit (expense), are recognized as a component of accumulated other comprehensive income (loss). Pension expense is charged to operating expenses.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued amendments to disclosure requirements for presentation of comprehensive income. The standard requires presentation (either in a single note or parenthetically on the face of the financial statements) of the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, a cross reference to the related footnote for additional information will be required. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The implementation of the amended accounting guidance has not had a material impact on the Company's consolidated financial position or results of operations.
In February 2013, the FASB issued new accounting guidance clarifying the accounting for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The implementation of the new accounting guidance is not expected to have a material impact on the Company's consolidated financial position or results of operations.
In March 2013, the FASB issued amendments to address the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The amendments are effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013 (early adoption is permitted). The implementation of the amended accounting guidance is not expected to have a material impact on the Company's consolidated financial position or results of operations.
Liquidity
Our long-term success will depend on our ability to achieve and sustain profitable operating results and our ability to raise additional capital on acceptable terms should additional capital be required. In the event that we are unable to achieve expected goals of profitability or raise sufficient additional capital, if needed, we may have to scale back or eliminate certain parts of our operations.
Based on our plan for continuing to combine the operating activities of both Chyron and Hego, and provided that we are able to achieve our planned results of operations and retain the availability under our credit facilities, we believe that cash on hand, net cash to be generated in the business, and availability of funding under our credit facilities, will be sufficient to meet our cash requirements for at least the next twelve months.
If these sources of funds are not sufficient, we may need to reduce, delay or terminate our existing or planned products and services. We may also need to raise additional funds through one or more capital financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or products, or grant licenses on terms that are not favorable to us.
There can be no assurance that additional funds will be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate development activities for one or more of our products or services, or delay, limit, reduce or terminate our sales and marketing capabilities or other activities that may be necessary to commercialize one or more of our products or services.
2. ACCOUNTS RECEIVABLE
Accounts receivable are stated net of an allowance for doubtful accounts of $0.6 million and $0.4 million at December 31, 2013 and 2012, respectively. Accounts receivable are
principally due from customers in, and dealers serving, the broadcast video industry. At December 31, 2013 and 2012, receivables included approximately $4.9 million and $2.2 million, respectively, due from foreign customers.
Bad debt expense amounted to $0.2 million in 2013 and zero in 2012. We record an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible and an additional allowance based on historical experience and management's assessment of the general financial conditions affecting the Company's customer base. We also evaluate the credit worthiness of the Company's customers and determine whether collateral (in the form of letters of credit or credit insurance) should be taken or whether reduced credit limits are necessary. Credit losses have consistently been within management's expectations. The carrying amounts of accounts receivable approximate their fair values.
3. INVENTORIES
Inventory is comprised of the following (in thousands):
| | December 31, |
| | 2013 | 2012 |
| Finished goods | $ 539 | $ 465 |
| Work-in-progress | 310 | 468 |
| Raw material | 1,967 | 1,352 |
| | $2,816 | $2,285 |
Inventories are stated net of reserves of approximately $5.4 million and $5.1 million at December 31, 2013 and 2012, respectively.
4. GOODWILL AND INTANGIBLE ASSETS
The Company’s goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in various business combinations. The Company also has an indefinite-lived intangible consisting of a tradename. Goodwill and intangible assets deemed to have indefinite lives are not amortized and are tested for impairment on an annual basis during our fourth quarter, or more frequently if circumstances indicate impairment might exist. Goodwill is evaluated for impairment through the comparison of fair value of our reporting units to their carrying values. When evaluating goodwill for impairment, we may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit is more-likely-than-not greater than its carrying amount. This qualitative assessment is referred to as a "step zero" approach. If, based on the review of the qualitative factors, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we bypass the required two-step impairment test. If we do not perform a qualitative assessment or if the fair value of the reporting unit is not more-likely- than-not greater than its carrying value, we perform the first step, which is referred to as step one, of the two-step impairment test, and calculate the estimated fair value of the reporting unit. If the carrying value of goodwill exceeds the estimated fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is
determined by comparing the implied fair value of the reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment loss for the difference. In considering the step zero approach to testing goodwill for impairment, we perform a qualitative analysis evaluating factors including, but not limited to, macro-economic conditions, market and industry conditions, internal cost factors, competitive environment, share price fluctuations, results of past impairment tests, and the operational stability and the overall financial performance of the reporting units. During the fourth quarter of fiscal 2013, we utilized a qualitative assessment for our reporting units where no significant change occurred and no potential impairment indicators existed since the previous evaluation of goodwill and indefinite-lived intangibles, and concluded it is more-likely-than-not that the fair values were more than their carrying value on a reporting unit basis. As we did not become aware of any impairment indicators subsequent to the date of the annual assessment, we determined there was no impairment to the goodwill of $18.9 million or the indefinite-lived intangible of $1.9 million as of December 31, 2013.
The components and estimated useful lives of intangible assets as of December 31, 2013 and 2012 are stated below. Amortization is provided on a straight line method, or in the case of customer relationships, on an accelerated method, over the following estimated useful lives (in thousands):
| | 2013 | |
| | Gross | Accumulated | Net | Estimated |
| | Amount | Amortization | Amount | Useful Life |
| Definite-lived intangibles: | | | | |
| Customer relationships | $ 6,570 | $1,512 | $5,058 | 10 years |
| Tradenames | 1,104 | 153 | 951 | 15 years |
| Proprietary technology | 1,420 | 403 | 1,017 | 10-15 years |
| Non-compete agreement | 25 | 25 | - | 3 years |
| Domain name and related website | 53 | 11 | 42 | 10-15 years |
| | 9,172 | 2,104 | 7,068 | |
| Indefinite-lived intangibles: | | | | |
| Tradename | 1,900 | - | 1,900 | |
| | $11,072 | $2,104 | $8,968 | |
| | 2012 | |
| | Gross | Accumulated | Net | Estimated |
| | Amount | Amortization | Amount | Useful Life |
| Tradenames | $ 304 | $ 101 | $ 203 | 15 years |
| Proprietary technology | 620 | 310 | 310 | 10 years |
| Non-compete agreement | 25 | 25 | - | 3 years |
| Customer relationships | 170 | 138 | 32 | 10 years |
| Domain name and related website | 23 | 9 | 14 | 15 years |
| | $1,142 | $ 583 | $ 559 | |
The activity in our goodwill balance consists of the following (in thousands):
| Balance at January 1, 2013 | $ 2,066 |
| Acquisitions: | |
| Hego AB | 16,321 |
| Granvideo AB | 561 |
| Balance at December 31, 2013 | $18,948 |
Amortization expense related to intangible assets for the years ended December 31, 2013 and 2012 was $1.52 million and $99 thousand, respectively. Annual amortization expense, in thousands, for intangible assets over the next five years ending December 31 is summarized as follows (in thousands):
| 2014 | $1,325 |
| 2015 | 1,124 |
| 2016 | 959 |
| 2017 | 824 |
| 2018 | 617 |
| Thereafter | 2,219 |
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
| | December 31, |
| | 2013 | 2012 |
| Machinery and equipment | $ 9,746 | $ 5,194 |
| Furniture and fixtures | 2,230 | 1,129 |
| Automobiles | 550 | - |
| Leasehold improvements | 276 | 167 |
| | 12,802 | 6,490 |
| Less: Accumulated depreciation | | |
| and amortization | 8,657 | 5,143 |
| | $ 4,145 | $ 1,347 |
Depreciation expense, which includes amortization of assets under capital lease, was $1.4 million and $0.8 million in 2013 and 2012, respectively.
The value of equipment recorded under capital leases was approximately $1.0 million and $0.15 million at December 31, 2013 and 2012, respectively.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in thousands):
| | December 31, |
| | 2013 | 2012 |
| Accounts payable | $4,498 | $1,924 |
| Accrued salaries, and other employee benefits | 1,859 | 529 |
| Accrued severance | 1,502 | 47 |
| Accrued warranty (Note 14) | 118 | 50 |
| Accrued medical costs | 136 | 197 |
| Other | 1,127 | 353 |
| | $9,240 | $3,100 |
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
| | December 31, | | December 31, |
| | 2013 | | 2012 |
| Revolving credit facilities - Europe | $ 933 | | $ - |
| Note payable - Europe | 921 | | - |
| Term loans - Europe | 355 | | - |
| Term loan - US | - | | 677 |
| Other | 95 | | - |
| | 2,304 | | 677 |
| Less: portion due within one year | 1,532 | | 280 |
| | $ 772 | | $ 397 |
Revolving credit facilities - Europe
As a result of the Business Combination, the Company has revolving credit facilities in Europe that total $1.3 million of which $0.9 million is outstanding at December 31, 2013. The revolving credit facilities have expiration dates of December 31, 2014 and automatically renew for twelve month periods, unless notified by the lender ninety days prior to expiration. The interest rate on these revolving credit facilities is 5.95%. The revolving credit agreements are collateralized by the assets of certain European subsidiaries of the Company.
Note payable - Europe
In connection with the acquisition of Granvideo AB, by the Company's 51% owned subsidiary Sportsground AB (see Note 8 of these consolidated financial statements), the Company issued a note to the previous shareholder of Granvideo AB in the principal amount of $1.2 million with a maturity date of December 31, 2017. The note does not bear interest and accordingly was recorded at an original discounted amount of $1.04 million. The Company made principal payments of $0.06 million on September 1, 2013 and $0.1 million on November 15,
2013 and is required to make four equal annual principal payments of $0.26 million on December 31 from 2014 to 2017. The principal balance at December 31, 2013 was $0.9 million.
Term loans - Europe
As a result of the Business Combination, the Company also has four term loans related to its European operations that total $0.4 million. Three of the term loans require principal payments totaling $10 thousand per month and bear interest at rates that range between 7.45% and 7.75% and will mature in 2014 and 2015. The fourth term loan, which has an outstanding balance of $0.2 million, bears interest that is payable quarterly at 15%, requires no principal payments and was paid in full in January 2014.
Term loan and revolving line of credit - US
On August 5, 2013, the Company entered into a loan modification and waiver agreement with Silicon Valley Bank ("SVB") whereby the expiration of the Company's then existing credit facility with SVB was extended with the intention that the Company and SVB would enter into a new credit facility. The Company failed to meet its financial covenants under this credit facility from May 31, 2013 to September 30, 2013 due to the Business Combination, which was not anticipated when the original covenant requirements were established. The Company obtained waivers from SVB with respect to those financial covenants.
In November 2013, the Company entered into a two-year $4.0 million revolving line of credit (the "Revolver") with SVB. Borrowings on the Revolver will be based on 80% of eligible accounts receivable. At December 31, 2013, available borrowings under the Revolver were $3.3 million but no borrowings were outstanding. The Company is also required to maintain an adjusted quick ratio ("AQR") of at least 1.25 to 1.0, measured at each calendar month-end. Additionally, if the Company's AQR falls below 1.5x at any month-end, then any borrowings will be repaid by SVB applying collections from the Company's SVB collateral account (for receipts by wire) and SVB lockbox account (for receipts by check) to reduce the revolving loan balance on a daily basis, until such time as the month-end AQR is again 1.5x or greater. If the AQR at month-end is 1.5x or greater, the Company will maintain a static loan balance and all collections will be deposited into the Company's operating account. At December 31, 2013, we are in compliance with our bank covenants.
The Revolver will bear interest at a floating annual rate equal to SVB's prime rate ("Prime") +1.25%. If the Company's AQR falls below 1.5x at any month-end, the interest rate will be Prime +1.75%. In connection with the Revolver, the Company was required to pay the outstanding balance on its previously outstanding term loan which was $0.4 million on the closing date. The original term loan was being repaid over 30 months and was subject to interest at Prime + 2.25% (which was 4.5% at December 31, 2013).
As is usual and customary in such lending agreements, the Revolver also contains certain non-financial requirements, such as required periodic reporting to the bank and various representations and warranties. The Revolver also restricts the Company's ability to pay dividends without the bank's consent.
The Revolver is collateralized by the assets of the U.S. subsidiaries of the Company, except for (i) its intellectual property rights which are subject to a negative pledge arrangement with the bank, and (ii) any equipment whose purchase is financed by any other lender or lessor, solely to the extent the security agreement with such lender or lessor prohibits junior liens on such equipment, and only until the lien held by such lender or lessor is terminated or released with respect to such equipment.
8. BUSINESS COMBINATIONS
On May 22, 2013, Chyron and Hego completed the Business Combination which was structured as a share purchase transaction, pursuant to the terms of a stock purchase agreement (the "Stock Purchase Agreement") whereby a wholly-owned subsidiary of Chyron acquired all of the issued and outstanding shares of Hego. Pursuant to the terms of the Stock Purchase Agreement, Chyron issued 12,199,431 shares of Chyron's common stock to the former Hego stockholders. The number of shares issued was equal to 40% of the total of (i) the issued and outstanding shares of Chyron's common stock as of May 10, 2013, (ii) the shares of Chyron's common stock issuable upon the exercise of all outstanding options and restricted stock units that had an exercise price of less than or equal to $1.25 per share as of May 10, 2013, and (iii) the shares issued at the closing, which are collectively referred to as the "Outstanding Closing Shares." In addition, upon Hego achieving certain revenue milestones during the fiscal years 2013, 2014 and 2015, the Company may issue additional shares, which are referred to as the "Earn-Out Shares" to the former Hego stockholders, such that the aggregate amount of shares of the Company's common stock issued in the transaction would equal up to 18,299,147 shares, or 50% of the total Outstanding Closing Shares and Earn-Out Shares. In connection with the Business Combination, the Company incurred $1.0 million in transaction costs that were expensed during 2013. The Company and Hego entered into the Business Combination to create a market leading company in the fields of TV graphics, data visualization and production services for 'Live' and on line news and sports production. The Company intends to broaden its range of sophisticated products and services offerings to grow in international markets.
The total purchase price of $24.6 million is comprised of 12.2 million shares of Chyron common stock (the Closing Shares) valued at $16.6 million, contingent consideration of shares of Chyron common stock (the Earn-Out Shares) valued at an estimated $7.5 million and $0.5 million in cash and other consideration. The $7.5 million represents the value of the Earn-Out Shares based on a probability-based model measuring the likelihood of achieving certain revenue milestones as detailed below, and has been recorded as a liability in the balance sheet. In connection with FASB ASC 805, Business Combinations, the fair value of the contingent consideration was established at the date of the Business Combination and included in the total purchase price at fair value. The contingent consideration is then adjusted to the then current fair value as an increase or decrease to earnings in each reporting period. This adjustment could have a material impact on the Company's financial position or results of operations. In the year ended December 31, 2013 a charge of $4.8 million has been recorded in order to adjust the contingent consideration to $12.3 million, its current fair value at December 31, 2013, in the level 3 category. Based on the revenue milestones, additional shares could be issued as follows:
| Revenue milestones | Additional shares |
| $15.5 million in 2013 | 2,772,598 |
| $16.0 million in 2014 | 1,584,342 |
| $16.5 million in 2015 | 1,742,776 |
| Total | 6,099,716 |
| | |
| Or, alternatively, if $33.0 million | |
| for 2013 and 2014 combined | 6,099,716 |
At December 31, 2013, the 2013 revenue milestone has been achieved and the respective additional shares will be issued in early 2014.
The following table summarizes the allocation of the purchase price (in thousands):
| Net fair value of assets acquired | $ 107 |
| Intangible assets, net of tax | 9,930 |
| Goodwill | 16,321 |
| | 26,358 |
| Deferred tax liability | (1,766) |
| | $24,592 |
The Company believes that the goodwill resulting from the Business Combination reflects the unique proprietary image and player tracking technology that strengthens our product and services offerings internationally and provides access to new and existing customers. The Company believes that this goodwill will not be deductible for tax purposes.
The components of the intangible assets acquired as of December 31, 2013 are stated below (in thousands):
| Definite-lived intangibles: | |
| Customer relationships | $ 6,400 |
| Proprietary technology | 800 |
| Other intangibles | 830 |
| | |
| Indefinite-lived intangibles: | |
| Tradename | 1,900 |
| | $ 9,930 |
Below are the unaudited proforma results of operations for the years ended December 31, 2013 and 2012 as if the Business Combination had occurred on January 1, 2012. Such proforma results are not necessarily indicative of the annual results of operations that would have been achieved if the Business Combination occurred on the date assumed, nor are they necessarily indicative of future consolidated results of operations (in thousands except per share data):
| | December 31, |
| | 2013 | 2012 |
| Net sales | $53,281 | $ 45,024 |
| Net loss | (8,282) | (28,010) |
| Net loss per share - basic and diluted | $ (0.28) | $ (0.96) |
In future periods, the combined business may incur charges to operations to reflect costs associated with integrating the two businesses that the Company cannot reasonably estimate at this time.
On September 1, 2013, Sportsground AB, a 51% owned subsidiary of the Company, purchased 100% of the equity of Granvideo AB ("Granvideo"). Granvideo is based in Sweden and operates in the high quality video broadcast market for web and TV. The purchase price was $1.04 million consisting of a note payable to the former shareholder of Granvideo with a principal amount of $1.2 million, recorded at a discounted value of $1.04 million to account for the fact that the note is not interest bearing. The Company made principal payments on the note of $0.06 million on September 1, 2013 and $0.1 million on November 15, 2013 and is required to make four equal annual principal payments of $0.26 million on December 31 from 2014 to 2017. The principal balance at December 31, 2013 was $0.9 million. The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on their fair values which totaled $0.5 million, resulting in $0.5 million of goodwill. Proforma information for this transaction is not included because the results of the acquired operations would not have materially impacted the Company's consolidated operating results.
ChyronHego AB, a wholly owned subsidiary of the Company, was a beneficial owner of approximately 60% of Hego Trac AB. In October 2013, Chyron Hego AB purchased the remaining 40% of the outstanding capital stock of Hego Trac AB. Pursuant to the terms of the purchase agreement, we issued 413,324 shares of our common stock and warrants to purchase up to 206,661 shares of our common stock at $1.59 per share. The total purchase price of $0.8 million is comprised of the value of the common stock issued of $0.6 million and the value of the warrants of $0.2 million, estimated using a Black-Scholes option valuation model. In accordance with ASC 810, changes in ownership interests that do not result in a change in control are considered equity transactions. Accordingly, the difference between carrying value of the minority interest and the fair value of the consideration paid has been recorded in additional paid in capital.
9. LONG-TERM INCENTIVE PLAN
Pursuant to the 2008 Long-term Incentive Plan (the "Plan"), the Company may grant stock options (non-qualified or incentive), stock appreciation rights, restricted stock and other share-based awards to employees, directors and other persons who serve the Company. The Plan is overseen by the Compensation Committee of the Board of Directors, which approves the timing and circumstances under which share-based awards may be granted. At December 31, 2013 there were 1.4 million shares available to be granted under the Plan. The Company issues new shares to satisfy the exercise or release of share-based awards. Under the provisions of Accounting Standards Codification Topic 718, Stock Compensation, all share-based payments
are required to be recognized in the statement of operations based on their fair values at the date of grant.
The fair value of each option award is estimated using a Black-Scholes option valuation model. Expected volatility is based on the historical volatility of the price of the Company's stock. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option. The Company uses historical data to estimate expected dividend yield, expected life and forfeiture rates. Options generally have a life of 10 years and have either time-based or performance-based vesting features. Time-based awards generally vest over a three year period, while the performance-based awards vest upon the achievement of specific performance targets. At December 31, 2013, there were no performance based awards outstanding. The fair values of the options granted during the years ended December 31, 2013 and 2012, were estimated based on the following weighted average assumptions:
| | 2013 | 2012 |
| Expected volatility | 76.87% | 71.46% |
| Risk-free interest rate | 1.78% | 0.58% |
| Expected dividend yield | 0.00% | 0.00% |
| Expected life (in years) | 6.00 | 6.00 |
| Estimated fair value per option granted | $1.08 | $0.67 |
The following table presents a summary of the Company's stock options for the year ended December 31, 2013:
| | | | | | Weighted | | |
| | | | Weighted | | average | | |
| | Number | | average | | remaining | | Aggregate |
| | of | | exercise | | contractual | | intrinsic |
| | options | | price | | life (years) | | value |
| Outstanding at January 1, 2013 | 4,294,273 | | $2.08 | | | | |
| Granted | 1,989,000 | | 1.61 | | | | |
| Exercised | (73,230) | | 0.72 | | | | |
| Forfeited and cancelled | (215,255) | | 1.57 | | | | |
| Outstanding at December 31, 2013 | 5,994,788 | | 1.96 | | 7.0 | | $2,904,515 |
| Exercisable at December 31, 2013 | 4,056,572 | | 2.13 | | 5.6 | | $1,929,051 |
The aggregate intrinsic value of options exercised during the year ended December 31, 2013 and 2012 was approximately $38 thousand and $1 thousand, respectively.
The Company also grants restricted stock units, or RSUs, that entitle the holder to a share of Company common stock. The fair value of an RSU is equal to the market value of a share of common stock on the date of grant.
The following table presents a summary of the Company's RSU activity for the year ended December 31, 2013:
| | | | Weighted average |
| | Shares | | grant date fair value |
| Nonvested at January 1, 2013 | 343,161 | | $1.76 |
| Granted | 329,164 | | 0.81 |
| Vested | (672,325) | | 1.30 |
| Nonvested at December 31, 2013 | - | | 0.00 |
On May 22, 2013, the Business Combination of Chyron and Hego, as discussed in Note 8 to these consolidated financial statements, constituted a change in control under the Company's long-term incentive plans. As a result, at the closing of the Business Combination, all outstanding awards became immediately exercisable and fully vested, without regard to any time and/or performance vesting conditions. As a result, the Company recorded a charge in 2013 of $1.3 million, representing the unamortized expense related to the vesting of such equity awards.
On May 2, 2013 the Company implemented a restructuring plan to reduce operating costs that resulted in the reduction of its workforce by 20 employees. All affected employees were provided with an adjustment in the terms of their stock options and/or RSUs that were outstanding on their termination date. Subject to a properly executed release by the affected employees, the stock option and RSU awards were amended to permit those awards to vest at their termination date regardless of performance conditions if any in the original award, and the expiration date for exercise of the stock options was extended through the end of the original term of the stock option, usually ten years from date of grant, rather than expiring ninety days after the employee's termination date as stated in the original awards. As a result, the Company recorded a charge in 2013 of approximately $0.4 million associated with the modifications of these awards.
In addition, each year the Company adopts a Management Incentive Compensation Plan (the "Incentive Plan") that entitles recipients to a combination of cash and equity awards based on achievement of certain performance and service criteria in the fiscal years for which the Incentive Plan is adopted. During the year ended December 31, 2013 the Company recorded an expense of $1.3 million associated with the awards under the Incentive Plan of which approximately 65% is payable in common stock. During 2012 no expense was recorded because no amounts were earned under the Plan.
The impact on the Company's results of operations of recording share-based compensation expense for the years ended December 31, 2013 and 2012 is as follows (in thousands):
| | 2013 | 2012 |
| Cost of sales | $ 35 | $ 75 |
| Research and development | 243 | 323 |
| Selling, general and administrative | 2,715 | 540 |
| | $2,993 | $ 938 |
As of December 31, 2013, there was approximately $1.7 million of total unrecognized share-based compensation cost related to stock options granted under the Company's plans to
employees or for services performed by non-employees that will be recognized over the next three years.
10. INCOME TAXES
The components of deferred income taxes are as follows (in thousands):
| | December 31, |
| | 2013 | 2012 |
| Deferred tax assets: | | |
| Net operating loss carryforwards | $ 12,074 | $ 14,491 |
| Inventory | 1,856 | 1,769 |
| Other liabilities | 3,051 | 3,055 |
| Fixed assets | 2,069 | 440 |
| Other temporary differences | 751 | 589 |
| | 19,801 | 20,344 |
| Less: valuation allowance | (19,745) | (20,344) |
| Total deferred tax assets | 56 | - |
| | | |
| Deferred tax liability: | | |
| Intangibles | (1,453) | - |
| Other temporary differences | (13) | - |
| Net deferred tax liability | $ (1,410) | $ - |
| | | |
| As reported: | | |
| Non-current deferred tax assets | $ 56 | $ - |
| Current deferred tax liability | $ (271) | $ - |
| Non-current deferred tax liabilities | $ (1,195) | $ - |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 2013, the gross deferred tax asset balance was $19.8 million and includes the $12.1 million tax effect of $34 million in U.S. Federal net operating loss carryforwards ("NOLs") expiring between 2018 and 2032. The Company has not recorded a deferred tax asset of approximately $1.3 million related to the NOLs resulting from the exercise of outstanding nonqualified stock options and restricted stock units which will be accounted for as a credit to additional paid in capital when realized as a reduction to income taxes payable.
Sections 382 and 383 of the Internal Revenue Code, and similar state regulations, contain provisions that may limit the net operating loss carryforwards available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% over a three-year period, the amount of the net operating loss carryforwards that the Company may utilize in any one year may be limited. As of December 31, 2013, the Company's net operating loss carryforwards are not limited by any such Section 382 limitations.
Accounting standards require that the Company continually assess the likelihood that its deferred taxes will be realizable. In making such assessment all available evidence, both positive and negative, must be considered in determining whether it is more likely than not that the deferred tax assets will be realized. Significant weight is given to evidence that can be objectively verified. In fiscal 2012 we considered the fact that we had incurred a net loss during that fiscal year, in addition to the consecutive losses in recent preceding fiscal years. Also in 2012, approximately $5.6 million of federal net operating losses, which had been fully reserved in 2011 as they were not deemed to be realizable based on management's expectation at such time, expired unutilized. These negative factors, combined with uncertain near-term market and economic conditions, reduced the Company's ability to rely on its projections of future taxable income in determining whether a valuation allowance was required. Accordingly, the Company concluded that a full valuation allowance was required. The Company will continue to assess the likelihood that its deferred tax assets will be realizable, and its valuation will be adjusted accordingly, which could materially impact its financial position and results of operations in future periods.
The components of loss before taxes for the years ended December 31, 2013 and 2012 consisted of the following (in thousands):
| | 2013 | 2012 |
| Domestic | $(1,162) | $(3,762) |
| Foreign | (6,772) | - |
| | $(7,934) | $(3,762) |
The Company's income tax benefit (expense) for the years ended December 31, 2013 and 2012 consisted of the following (in thousands):
| | 2013 | 2012 |
| Current: | | |
| State and foreign | $ 87 | $ (38) |
| | | |
| Deferred: | | |
| State | (21) | 53 |
| Federal | (2) | 921 |
| Foreign | 93 | - |
| | 70 | 974 |
| Valuation allowance | (23) | (19,475) |
| Income tax benefit (expense) | $ 134 | $(18,539) |
The effective income tax rate differed from the Federal statutory rate as follows (dollars in thousands):
| | 2013 | | 2012 |
| | Amount | % | | Amount | % |
| Federal income tax benefit at | | | | | |
| statutory rate | $ 2,698 | 34.0 | | $ 1,279 | 34.0 |
| Permanent items: | | | | | |
| Nondeductible mark-to-market adjustment | | | | | |
| for contingent liability | (1,047) | (13.2) | | - | - |
| Nondeductible share based payments | (464) | (5.8) | | - | - |
| Nondeductible merger transaction costs | (353) | (4.4) | | - | - |
| Other nondeductible items | (43) | (0.6) | | (150) | (4.1) |
| Research and development credits | (133) | (1.7) | | - | - |
| International tax rate differentials | (813) | (10.3) | | (18) | (0.4) |
| Other | (310) | (3.7) | | (175) | (4.6) |
| Effect of increase in valuation allowance | | | | | |
| for deferred tax assets | 599 | 7.4 | | (19,475) | (517.7) |
| | $ 134 | 1.7 | | $(18,539) | (492.8) |
The difference between our effective income tax rate and the federal statutory rate is primarily due to transaction costs associated with our Business Combination with Hego and the mark to market adjustment for our contingent liability that will not be deductible for tax purposes and the amount of expense associated with our share-based payment arrangements which are not deductible and the portion thereof that will give rise to tax deductions.
The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. It may be subject to examination by the Internal Revenue Service ("IRS") for calendar years 2010 through 2013 under the normal statute of limitations. Additionally, any net operating losses that were generated in prior years and utilized in these years may also be subject to examination by the IRS. Generally, for state tax purposes, the Company's 2009 through 2013 tax years remain open for examination by the tax authorities under a four year statute of limitations, however, certain states may keep their review period open for six to ten years. The Company has evaluated its income tax positions and determined that no material uncertain tax positions existed at December 31, 2013. The Company does not expect a significant change in its unrecognized tax benefits within the next twelve months.
Deferred taxes have not been provided for approximately $0.9 million of undistributed earnings of foreign subsidiaries. Any undistributed earnings are expected to be permanently reinvested in our foreign operations. A deferred tax liability is recognized when we expect that we will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. The Company intends to permanently reinvest any undistributed earnings as the Company has cash in the U.S. and the ability to borrow funds in the U.S. if necessary. Furthermore, the Company has no plan for further repatriation. Determination of the amount of the unrecognized U.S. income tax liability on undistributed earnings is not practical because of the complexities of the hypothetical calculation. In addition, unrecognized foreign tax credit carryforwards would be available to reduce a portion of such U.S. tax liability.
11. OTHER COMPREHENSIVE INCOME
Components and activity related to accumulated other comprehensive income (loss) is as follows (in thousands):
| | Foreign | | | | Accumulated |
| | Currency | | Pension | | Other |
| | Translation | | Benefit | | Comprehensive |
| | Adjustment | | Costs | | Income (Loss) |
| January 1, 2012 | $ (26) | | $(1,402) | | $(1,428) |
| Change for period | 13 | | (1,080) | | (1,067) |
| Amounts reclassified from | | | | | |
| accumulated other | | | | | |
| comprehensive income (loss) | - | | 170 | | 170 |
| December 31, 2012 | (13) | | (2,312) | | (2,325) |
| Change for period | 144 | | 1,507 | | 1,651 |
| Amounts reclassified from | | | | | |
| accumulated other | | | | | |
| comprehensive income (loss) | - | | 253 | | 253 |
| December 31, 2013 | $ 131 | | $ (552) | | $ (421) |
The amounts reclassified from accumulated other comprehensive income (loss) for both 2013 and 2012 were recorded as part of selling, general and administrative expenses on our Consolidated Statements of Operations.
12. FAIR VALUE MEASUREMENTS
Financial assets and liabilities at fair value at December 31, 2013 and 2012 are classified in one of the three categories, which are described below.
| | · | Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. |
| | · | Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. |
| | · | Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. |
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers a counterparty credit risk in its assessment of fair value.
The carrying amount of cash and cash equivalents, accounts receivables and accounts payables and other short-term financial instruments approximate their fair value due to their short-term nature. Included in cash equivalents at December 31, 2013 are $3.9 million of investments in overnight repurchase agreements which are categorized as level 2 for fair value measurement. The Company believes that borrowings outstanding under its revolvers and its term loans approximate fair value because such borrowings bear interest at current variable market rates. The Company's borrowings are categorized as level 2 for fair value measurement. The contingent consideration, resulting from the Business Combination with Hego, has been adjusted to its fair value of $12.3 million at December 31, 2013, in the level 3 category. The contingent consideration was calculated using a probability based model measuring the likelihood of achieving the revenue milestones, as defined in the Stock Purchase Agreement, and valued based on the market value of the Company's common stock. At December 31, 2013, the likelihood of achieving the revenue milestones was based on a probability level of 100% relating to the 2013 earn-out and 90% for the 2014 and 2015 earn-outs, respectively.
Additionally, on a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. Measurements based on undiscounted cash flows are considered to be level 3 inputs. During the fourth quarter of each year, the Company evaluates goodwill and indefinite-lived intangibles for impairment at the reporting unit level including, but not limited to macro-economic conditions, market and industry conditions, internal cost factors, competitive environment, share price fluctuation, results of past impairment tests and the operational stability and the overall performance of the reporting units. This measurement would be classified based on level 3 input.
The following table represents a reconciliation of items measured at fair value on a recurring basis using unobservable inputs (level 3) (in thousands):
| Balance at January 1, 2013 | $ - |
Additions to level 3 (1) | 7,500 |
| Unrealized loss for the year - change in fair | |
| value of contingent consideration | 4,760 |
| Balance at December 31, 2013 | $12,260 |
| | (1) | Represents the initial recording of the contingent consideration from the Business Combination with Hego. |
13. BENEFIT PLANS
The Company has a domestic defined benefit pension plan (the "U.S. Pension Plan") covering certain U.S. employees meeting minimum eligibility requirements. Benefits paid to retirees are based upon age at retirement, years of credited service and average compensation. The U.S. Pension Plan was closed to new employees that joined the Company on or after October 1, 2006. Pension expense is actuarially determined using the projected unit credit method. The Company's policy is to fund the minimum contributions required under the Employee Retirement Income Security Act (ERISA), and, subject to cash flow levels, the Company may choose to make a discretionary contribution to the U.S. Pension Plan to reduce the unfunded liability. The Company made required contributions to the U.S. Pension Plan in 2013 of $0.3 million. Based on current assumptions, the Company expects to make approximately $0.5 million in contributions during 2014. The Company uses a December 31 measurement date to determine pension benefit obligations.
Benefit plan information for the U.S. Pension Plan is as follows (in thousands):
| | 2013 | 2012 |
| Reconciliation of projected benefit obligation: | | |
| Obligation at January 1 | $ 9,479 | $ 7,535 |
| Service cost | 408 | 482 |
| Interest cost | 384 | 360 |
| Actuarial (gain)/ loss | (1,153) | 1,164 |
| Benefit payments | (679) | (62) |
| Curtailments | (72) | - |
| Obligation at December 31 | $ 8,367 | $ 9,479 |
| | | |
| Reconciliation of fair value of plan assets: | | |
| Fair value of plan assets at January 1 | $ 5,328 | $ 4,088 |
| Actual return on plan assets | 720 | 407 |
| Employer contributions | 283 | 895 |
| Benefit payments | (679) | (62) |
| Fair value of plan assets at December 31 | $ 5,652 | $ 5,328 |
| | | |
| Funded Status: | | |
| Unfunded status at December 31 | $ (2,715) | $ (4,151) |
| | | |
| Projected benefit obligation | $ 8,367 | $ 9,479 |
| Accumulated benefit obligation | 7,894 | 8,701 |
| Fair value of plan assets | 5,652 | 5,328 |
| | | |
| Amounts recognized in consolidated balance sheets: | | |
| Prior service credit | $ - | $ 7 |
| Net loss | (1,325) | (3,093) |
| Accumulated other comprehensive loss | (1,325) | (3,086) |
| | | |
| Net periodic benefit cost in excess of | | |
| accumulated contributions | (1,390) | (1,065) |
| Net amount recognized in consolidated balance sheet | $ (2,715) | $ (4,151) |
| | 2013 | 2012 |
| Components of net periodic pension cost: | | |
| Service cost | $ 408 | $ 482 |
| Interest cost | 384 | 360 |
| Expected return on plan assets | (410) | (345) |
| Amortization of net loss | 232 | 203 |
| Amortization of prior service credit | (6) | (11) |
| Net periodic benefit cost | 608 | 689 |
| | | |
| Curtailment gain | (1) | - |
| Net periodic benefit cost after curtailment | 607 | 689 |
| Other changes in plan assets and benefit obligations | | |
| recognized in other comprehensive income: | | |
| Net loss | (1,463) | 1,102 |
| Amortization of net loss | (232) | (203) |
| Amortization of prior service cost | 6 | 11 |
| Curtailment (gain) loss | (72) | - |
| Prior service credit/(cost) received due to curtailment | 1 | - |
| Total recognized in other comprehensive (income) loss | (1,760) | 910 |
| | | |
| Total recognized in net periodic benefit cost and other | | |
| comprehensive (income) loss | $(1,153) | $1,599 |
In 2014, the Company expects that a net loss of $55 thousand, transition asset/(obligation) of $0, and a prior service credit of $6 thousand will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost.
| | 2013 | 2012 |
| Weighted-average assumptions used to determine net periodic | | |
| benefit cost for the years ended December 31: | | |
| Discount rate | 4.03% | 4.61% |
| Expected long-term return on plan assets | 7.50% | 7.50% |
| Rate of compensation increase | (a) | (b) |
| | | |
| Weighted-average assumptions used to determine pension | | |
| benefit obligation as of December 31: | | |
| Discount rate | 4.9% | 4.03% |
| Rate of compensation increase | (a) | (b) |
| | (a) | 0.0% in 2013, 2.0% thereafter |
| | (b) | 0.0% in 2012 and 2013, 2.0% thereafter |
The assumed expected long-term rate of return on plan assets is an estimate based on the Company's plan investment guidelines which specify the Company's strategic asset allocation, historical performance for the various asset classes in its strategic allocation, and its expectations for long-term rates of return for these various asset classes. The Company recognizes that market performance varies and that its assumed expected long-term rate of return may not be meaningful during some periods. The Company re-evaluates its assumed expected long-term rate of return
on plan assets annually through discussion with its plan investment manager. The Company selects that return which it believes best reflects a reasonable expected return on funds invested and to be invested to provide for the benefits included in the projected benefit obligation. The overall investment objective for the pension plan investment portfolio is to achieve the highest level of return with the least amount of risk. The Company's actual pension plan asset allocations at December 31, 2013 and 2012 are as follows:
| | Target | | Actual |
| | Allocation Range | | Allocation |
| Asset Category | 2013 | | 2013 | 2012 |
| Equity securities | 60% (+/- 1 to 5%) | | 62% | 58% |
| Debt securities | 35% (+/- 1 to 5%) | | 31% | 33% |
| Cash and cash equivalents | 5% (+/- 1 to 5%) | | 7% | 9% |
The following table presents estimated future benefit payments over the next ten years (in thousands):
| 2014 | $ 204 |
| 2015 | 164 |
| 2016 | 176 |
| 2017 | 377 |
| 2018 | 393 |
| 2019 to 2023 | 2,885 |
The amortization of gains and losses is determined by using a 10% corridor of the greater of the market-related value of assets and the projected benefit obligation. Total unamortized gains and losses in excess of the corridor are amortized into income over the average remaining future service. Prior service costs/(benefits) are amortized over the average remaining future service at the time the prior service was established. Average remaining future service as of January 1, 2013 was about 9 years.
The following table sets forth by level, within the fair value hierarchy, the U.S. Pension Plan's assets measured at fair value on a recurring basis as of December 31 (in thousands):
| | 2013 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Government and other | | | | | | | |
| fixed income securities | $ 591 | | $1,181 | | $ - | | $1,772 |
| | | | | | | | |
| Equities | 3,499 | | - | | - | | 3,499 |
| | $4,090 | | $1,181 | | $ - | | $5,271 |
| | 2012 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Government and other | | | | | | | |
| fixed income securities | $ 601 | | $1,158 | | $ - | | $1,759 |
| | | | | | | | |
| Equities | 3,063 | | - | | - | | 3,063 |
| | $3,664 | | $1,158 | | $ - | | $4,822 |
The Company has adopted a 401(k) Plan exclusively for the benefit of participants and their beneficiaries. All U.S. employees of ChyronHego are eligible to participate in the 401(k) Plan. An employee may elect to contribute a percentage of his or her current compensation to the 401(k) Plan, subject to a maximum of 20% of compensation or the Internal Revenue Service annual contribution limit, whichever is less. The Company may make discretionary matching contributions of the compensation contributed by a participant. The discretionary matching contribution is two-thirds of the first 6% of qualifying compensation. The Company has the option of making the matching contributions in cash or through shares of Company common stock. Employees will vest in the matching contributions in equal increments annually over three years. During 2013 and 2012, the Company match was substantially made in the form of newly issued ChyronHego common stock. As a result, the Company issued 204 thousand and 233 thousand shares of common stock, in lieu of an aggregate cash match of $243 thousand and $288 thousand during 2013 and 2012, respectively.
Substantially all employees of the Company's foreign subsidiaries receive retirement benefits, at least to the extent required, through funds that are governed by local statutory requirements. Contributions are typically based on specified percentages of the employees' salaries.
14. PRODUCT WARRANTY
The Company provides product warranties for its various products, typically for one year. Liabilities for the estimated future costs of repair or replacement are established and charged to cost of sales at the time the sale is recognized. The Company established its reserve based on such historical data, taking into consideration specific product information. The following table sets forth the movement in the warranty reserve (in thousands):
| | 2013 | 2012 |
| Balance at beginning of period | $ 50 | $ 50 |
| Provisions | 170 | 49 |
| Warranty services provided | (102) | (49) |
| | $ 118 | $ 50 |
15. COMMITMENTS AND CONTINGENCIES
At December 31, 2013, the Company was obligated under operating and capital leases, expiring at various dates through 2019, covering facility space and equipment as follows (in thousands):
| | Operating | Capital |
| 2014 | $1,872 | $ 215 |
| 2015 | 1,720 | 159 |
| 2016 | 1,560 | 43 |
| 2017 | 1,160 | |
| 2018 | 1,110 | |
| thereafter | 622 | |
The operating lease contains provisions for escalations and for facility maintenance. Total rent expense was approximately $1.1 million in 2013 and $0.7 million in 2012.
The Company has severance arrangements for key and virtually all other employees of the Company that provide for payment of a portion of their salary and continuance of their benefits for their severance period, in the event they are involuntarily terminated. The severance periods range from a week to a number of months depending on the length of service and/or level of the employee within the Company. Had all such key and other covered employees been terminated at December 31, 2013, the estimated total severance and benefits would have approximated $2.2 million.
At December 31, 2013, the Company has commitments for hosting services of $1.9 million over the next three years.
The Company is not a party to any legal proceedings that it believes will have a material impact on its business, financial condition, results of operations or liquidity.
16. DUE TO RELATED PARTIES
The balance due to related parties represents amounts that are due to certain former shareholders or employees of Hego AB that are now shareholders or employees of the Company. The balance resulted from loans to Hego AB, and dividends declared but not paid by Hego AB, prior to its merger with Chyron. Interest is accrued on the outstanding balance at the annual rate of 5.95%.
17. SEGMENT AND GEOGRAPHIC INFORMATION
Revenues by geography are based on the country in which the end user customer resides. Geographic information about revenue and long-lived assets (excluding goodwill and intangible assets) are detailed as follows (in thousands):
| | 2013 | 2012 |
Revenues from external customers(1): | | |
| North America | $26,250 | $21,218 |
| Europe, Middle East and Africa (EMEA) | 16,492 | 4,254 |
| Latin America | 3,092 | 2,538 |
| Asia | 1,573 | 2,212 |
| | $47,407 | $30,222 |
(1)Included in North America revenues are $25.1 million of revenues from external customers in the United States and included in EMEA revenues are $7.8 million of revenues from external customers in Sweden. No revenues from any other individual country makes up more than 10% of consolidated revenues.
| Long-lived assets: | | |
| United States | $ 910 | $1,347 |
Europe(2) | 3,235 | - |
(2)Approximately $2.1 million and $0.9 million of long-lived assets are in Sweden and Finland, respectively. No other country holds more than 10% of long-lived assets.
Prior to the Business Combination with Hego, the Company operated as one reporting segment. As a result of the Business Combination the Company was organized, managed and internally reported as two segments in fiscal 2013. Because the Company will not evaluate performance based upon return on assets at the operating segment level, assets are not tracked internally by segment, and therefore, segment asset information is not presented.
The Company's revenues, provided by both segments, include sales of graphics products for the broadcast and sports industries. The Company's services revenues include production services, development and sales of maintenance contracts.
Operating segment data is as follows (in thousands):
| | Operating income | | | | |
| | (loss) before | Depreciation | Operating | | |
| | depreciation and | and | income | | |
| | amortization | amortization | (loss) | | Revenue |
| Hego | $ 1,950 | $(2,095) | $ (145) | | $12,961 |
| Chyron | 5,781 | (818) | 4,963 | | 34,446 |
| Corporate | | | | | |
| (unallocated) | (12,466) | - | (12,466) | | - |
| | $ (4,735) | $(2,913) | $ (7,648) | | $47,407 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
| (a) | Evaluation of Disclosure Controls and Procedures |
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K, have concluded, that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which this report is being prepared.
On May 22, 2013 the Company completed the Hego Business Combination for a purchase price of $24.6 million represented substantially by goodwill and identifiable intangible assets. Hego's operations contributed approximately $13.0 million in revenues to our consolidated financial results for the year ended December 31, 2013. We continue to evaluate the internal control over financial reporting of the acquired business. As permitted by SEC Staff interpretive guidance for newly acquired businesses, the internal control over financial reporting of Hego was excluded from a formal evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2013 but we will include an assessment in the year following the date of the Business Combination.
| (b) | Changes in Internal Control Over Financial Reporting |
There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
| | · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; |
| | · | provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| | · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition or disposition of our assets that could have a material effect on the financial statements. |
Internal control over financial reporting, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Therefore, even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the design and effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in "Internal Control - Integrated Framework (1992)." Based on its assessment, management believes that as of December 31, 2013, the Company's internal control over financial reporting is effective.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by this item will be presented under the captions ELECTION OF DIRECTORS and SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE, in our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 2014 Annual Meeting of Shareholders ("Proxy Statement"), and is incorporated herein by reference in response to this item.
We have a written code of ethics for senior financial officers, including our principal executive officer, principal financial officer, principal accounting officer or controller and any other persons performing similar functions. The code of ethics is available on the Investor Relations section of our website under the heading "Investors" at www.chyronhego.com. In addition, the Company will provide to any person, without charge, a copy of such code of ethics, upon written request to: Corporate Secretary, ChyronHego Corporation, 5 Hub Drive, Melville, NY 11747.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item will be presented under the captions COMPENSATION COMMITTEE REPORT, COMPENSATION DISCUSSION AND ANALYSIS, EXECUTIVE COMPENSATION, DIRECTOR COMPENSATION, and COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION in our Proxy Statement, and is incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information called for by this item will be presented under the captions PRINCIPAL SHAREHOLDERS and EQUITY COMPENSATION PLAN INFORMATION in our Proxy Statement, and is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information called for by this item will be presented under the caption ELECTION OF DIRECTORS and CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS in our Proxy Statement, and is incorporated herein by reference in response to this item.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by this item will be presented under the caption AUDIT COMMITTEE REPORT and RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM in our Proxy Statement, and is incorporated herein by reference in response to this item.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) | The following documents are filed as part of this Annual Report on Form 10-K: |
(a)(1) and (2)
See Index to Consolidated Financial Statements on page 42 at Item 8 to this Annual Report on Form 10-K. Other financial statement schedules have not been included because they are not applicable or the information is included in the financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed as part of, or are incorporated by reference into, this Annual Report on Form 10-K.
Exhibit Index
Exhibit Number | Description |
| 2.1 | Stock Purchase Agreement by and among, Chyron Corporation, Chyron Holdings, Inc., Chyron AB, Hego Aktiebolag, Westhill Group AB (corp. reg. no. 556583-5948) as the stockholder representative of the Hego stockholders, and the stockholders of Hego Aktiebolag, dated as of March 9, 2013 (previously filed as exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the Commission on March 12, 2013 (File No. 001-09014) and incorporated herein by reference). |
| 3.1 | Restated Certificate of Incorporation filed with the State of New York on December 27, 1991 (previously filed as Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1991 (File No. 000-05110) and incorporated herein by reference). |
| 3.2 | Certificate of Amendment of the Restated Certificate of Incorporation filed with the State of New York on February 7, 1997 (previously filed as Exhibit 3(c) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 001-09014) and incorporated herein by reference). |
| 3.3 | Certificate of Amendment of the Restated Certificate of Incorporation filed with the State of New York on September 19, 2007 (previously filed as Exhibit 3(i) to the Registrant's Current Report on Form 8-K filed with the Commission on September 24, 2007 (File No. 000-05110) and incorporated herein by reference). |
| 3.4 | Certificate of Amendment of the Restated Certificate of Incorporation filed with the State of New York on May 22, 2013 (previously filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed with the Commission on May 29, 2013 (File No. 001-09014) and incorporated herein by reference). |
| 3.5 | Amended and Restated By-Laws of ChyronHego Corporation (previously filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed with the Commission on November 14, 2013 (File No. 001-09014) and incorporated herein by reference). |
| 10.1* | Indemnification Agreement between Chyron Corporation and Christopher R. Kelly effective as of August 30, 1999 (previously filed as Exhibit 10(f) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 000-05110) and incorporated herein by reference). |
| 10.2* | Indemnification Agreement between Chyron Corporation and Michael Wellesley-Wesley effective as of November 19, 1996 previously filed as Exhibit 10(xx) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 001-09014) and incorporated herein by reference). |
| 10.3* | Indemnification Agreement between Chyron Corporation and Michael Wheeler effective as of February 1, 2006( previously filed as Exhibit 10(g) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (File No. 001-09014) and incorporated herein by reference). |
| 10.4* | Indemnification Agreement between Chyron Corporation and Peter Frey effective as of May 14, 2008 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on May 20, 2008 (File No. 001-09014) and incorporated herein by reference). |
| 10.5* | Indemnification Agreement between Chyron Corporation and Roger L. Ogden effective as of May 14, 2008 (previously filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Commission on May 20, 2008 (File No. 001-09014) and incorporated herein by reference). |
| 10.6* | Indemnification Agreement between Chyron Corporation and Robert A. Rayne effective as of May 14, 2008 (previously filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed with the Commission on May 20, 2008 (File No. 001-09014) and incorporated herein by reference). |
| 10.7* | Indemnification Agreement between Chyron Corporation and Susan Clark-Johnson effective as of March 10, 2010 (previously filed as Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (File No. 001-09014) and incorporated herein by reference). |
| 10.8* | Indemnification Agreement between Chyron Corporation and Dawn Johnston effective as of April 3, 2002 (previously filed as Exhibit 10(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (File No. 001-09014) and incorporated herein by reference). |
| 10.9* | Indemnification Agreement between Chyron Corporation and Kathleen Power effective as of November 6, 2012 (previously filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (File No. 001-09014) and incorporated herein by reference). |
| 10.10* | Indemnification Agreement between ChyronHego Corporation and Johan Apel effective as of May 22, 2013.** |
| 10.11* | Indemnification Agreement between ChyronHego Corporation and Henrik Sundberg effective as of May 22, 2013.** |
| 10.12* | Employment Agreement by and between Chyron Corporation and Kathleen Power effective as of March 7, 2012 (previously filed as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (File No. 001-09014) and incorporated herein by reference). |
| 10.13* | Employment Agreement by and between Chyron Corporation and Michael Wellesley-Wesley effective as of May 23, 2012 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on May 29, 2012 (File No. 001-09014) and incorporated herein by reference). |
| 10.14* | Employment Agreement between ChyronHego Corporation and Johan Apel, dated as of May 23, 2013 (previously filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 (File No. 001-09014) and incorporated herein by reference). |
| 10.15* | Employment Agreement between ChyronHego Corporation and Kevin Prince, dated as of May 23, 2013 (previously filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 (File No. 001-09014) and incorporated herein by reference). |
| 10.16* | Employment Agreement between ChyronHego Corporation and Soren Kjellin, dated as of May 23, 2013 (previously filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 (File No. 001-09014) and incorporated herein by reference). |
| 10.17* | Change in Control Agreement between Michael Wellesley-Wesley and Chyron Corporation effective May 23, 2012 (previously filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Commission on May 29, 2012 (File No. 001-09014) and incorporated herein by reference). |
| 10.18* | Amended and Restated Change in Control Agreement by and between Chyron Corporation and Michael Wellesley-Wesley dated November 19, 2012 (previously filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed with the Commission on November 20, 2012 (File No. 001-09014) and incorporated herein by reference). |
| 10.19* | Separation Agreement between the Company and Michael Wellesley-Wesley dated November 7, 2013 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on November 13, 2013 (File No. 001-09014) and incorporated herein by reference). |
| 10.20* | Change in Control Agreement between Chyron Corporation and Jerry Kieliszak dated November 19, 2012 (previously filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Commission on November 20, 2012 (File No. 001-09014) and incorporated herein by reference). |
| 10.21* | Terms of Severance Agreement between Chyron Corporation and Jerry Kieliszak dated November 19, 2012 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on November 20, 2012 (File No. 001-09014) and incorporated herein by reference). |
| 10.22* | Separation Agreement between the Company and Jerry Kieliszak dated December 16, 2013 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on December 16, 2013 (File No. 001-09014) and incorporated herein by reference). |
| 10.23* | Chyron Corporation 1999 Incentive Compensation Plan (previously filed as Exhibit 1 to the Registrant's Definitive Proxy Statement on Schedule 14A filed with the Commission on April 7, 1999 (SEC File No. 000-05110) and incorporated herein by reference). |
| 10.24* | Chyron Corporation 2008 Long-Term Incentive Plan approved on May 14, 2008 and amended on May 19, 2010 (previously filed as Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with the Commission on May 25, 2010 (File No. 001-09014) and incorporated herein by reference). |
| 10.25* | Chyron Corporation's 2008 Long Term Incentive Plan, as amended (incorporated by reference to Chyron's Proxy Statement on Schedule 14A filed with the SEC on April 17, 2013 (File No. 01-09014) (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on May 29, 2013 (File No. 001-09014) and incorporated herein by reference). |
| 10.26* | Chyron Corporation Employees Severance Plan amended August 9, 2006 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on August 14, 2006 (File No. 001-09014) and incorporated herein by reference). |
| 10.27 | Loan and Security Agreement between Silicon Valley Bank and Chyron Corporation dated as of June 19, 2008 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on June 23, 2008 (File No. 001-09014) and incorporated herein by reference). |
| 10.28 | First Loan Modification Agreement between Silicon Valley Bank and Chyron Corporation dated April 16, 2009 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on June 18, 2009 (File No. 001-09014) and incorporated herein by reference). |
| 10.29 | Second Loan Modification Agreement between Silicon Valley Bank and Chyron Corporation dated June 18, 2009 (previously filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Commission on June 18, 2009 (File No. 001-09014) and incorporated herein by reference). |
| 10.30 | Third Loan Modification Agreement between Silicon Valley Bank and Chyron Corporation dated March 24, 2010 and effective as of March31, 2010 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on March 30, 2010 (File No. 001-09014) and incorporated herein by reference). |
| 10.31 | Fourth Loan Modification Agreement between Silicon Valley Bank and Chyron Corporation dated March 24, 2011 and effective as of March 30, 2011 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on March 25, 2011 (File No. 001-09014) and incorporated herein by reference). |
| 10.32 | Fifth Loan Modification Agreement between Silicon Valley Bank and Chyron Corporation dated December 28, 2011 and effective as of December 31, 2011 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on January 4, 2012 (File No. 001-09014) and incorporated herein by reference). |
| 10.33 | Sixth Loan Modification Agreement between Silicon Valley Bank and Chyron Corporation dated August 13, 2012 (previously filed as exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on August 16, 2012 (File No. 001-09014) and incorporated herein by reference). |
| 10.34 | Seventh Loan Modification Agreement between Silicon Valley Bank and Chyron Corporation dated March 1, 2013 (previously filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013 (File No. 001-09014) and incorporated herein by reference). |
| 10.35 | Eighth Loan Modification Agreement between Silicon Valley Bank and Chyron Corporation dated August 5, 2013 (previously filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 (File No. 001-09014) and incorporated herein by reference). |
| 10.36 | Amended and Restated Loan and Security Agreement between ChyronHego Corporation, Chyron Holders, Inc. and Chyron International Corporation and Silicon Valley Bank, dated November 12, 2013 (previously filed as exhibit 10.1 to the Registrant's Annual Report on Form 8-K filed with the commission on November 18, 2013 (File No. 001-09014) and incorporated herein by reference). |
| 10.37 | Second Amendment to Lease by and between Rechler Equity B-1 LLC and Chyron Corporation dated January 20, 2009 (previously filed as exhibit 10.29 to the Registrant's Annual Report on Form 10-K filed with the commission on March 25, 2009 (File No. 001-09014) and incorporated herein by reference). |
| 10.38* | Form of Restricted Stock Unit Award under the Chyron Corporation 2008 Long-Term Incentive Plan (previously filed as Exhibit 10.1 the Registrant's Current Report on Form 8-K filed with the Commission on November 13, 2009 (File No. 001-09014) and incorporated herein by reference). |
| 10.39* | Chyron Corporation Non-Employee Director Compensation Policy (previously filed as exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (File No. 001-09014) and incorporated herein by reference). |
| 10.40* | 2012 Management Incentive Compensation Plan (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on March 13, 2012 (File No. 001-09014) and incorporated herein by reference). |
| 10.41* | 2013 Management Incentive Compensation Plan (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on January 15, 2013 (Filed No. 001-09014) and incorporated herein by reference). |
| 10.42* | Second Half of 2013 Management Incentive Compensation Plan (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on August 12, 2013 (Filed No. 001-09014) and incorporated herein by reference). |
| 10.43* | 2014 Management Incentive Compensation Plan (previously filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Commission on December 16, 2013 (Filed No. 001-09014) and incorporated herein by reference). |
| 10.44* | Form of Restricted Stock Unit Award Cancellation Agreement under the Chyron Corporation 2008 Long-Term Incentive Plan Policy (previously filed as exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (File No. 001-09014) and incorporated herein by reference). |
| 21.1 | Subsidiaries of the Registrant.** |
| 23.1 | Consent of BDO USA, LLP ** |
| 31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** |
| 31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** |
| 32 | Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
| 101 | The following materials from ChyronHego Corporation's Annual Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Shareholders' Equity, and (vi) Notes to Consolidated Financial Statements. |
| * | Management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | CHYRONHEGO CORPORATION |
| | |
| Date: March 14, 2014 | /s/ Johan Apel |
| | Johan Apel |
| | President and Chief Executive Officer |
| | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on the dates indicated.
| Signature | | Title | Date |
| | | | |
| /s/ Johan Apel | | President and Chief Executive Officer | March 14, 2014 |
| Johan Apel | | (Principal Executive Officer) | |
| | | | |
| /s/ Dawn R. Johnston | | Interim Chief Financial Officer | March 14, 2014 |
| Dawn R. Johnston | | (Principal Financial Officer) | |
| | | | |
| /s/ Roger L. Ogden | | Chairman of the Board of Directors | March 14, 2014 |
| Roger L. Ogden | | | |
| | | | |
| /s/ Susan Clark-Johnson | | Director | March 14, 2014 |
| Susan Clark-Johnson | | | |
| | | | |
| /s/ Peter F. Frey | | Director | March 14, 2014 |
| Peter F. Frey | | | |
| | | | |
| /s/ Christopher R. Kelly | | Director | March 14, 2014 |
| Christopher R. Kelly | | | |
| | | | |
| /s/ Robert A. Rayne | | Director | March 14, 2014 |
| Robert A. Rayne | | | |
| | | | |
| /s/ Henrik Sundberg | | Director | March 14, 2014 |
| Henrik Sundberg | | | |
| | | | |
| /s/ Michael C. Wheeler | | Director | March 14, 2014 |
| Michael C. Wheeler | | | |
| | | | |
| /s/ Michael Wellesley-Wesley | | Director | March 14, 2014 |
| Michael Wellesley-Wesley | | | |
86
